Noncompete agreements should be in writing

By Andi Gray

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We have a problem with noncompetes. Neither our employees nor our business partners have signed one. Just recently a friend of ours had an employee walk out and try to take clients with him. And another friend had a partner try to steal business that they had agreed to work on together. We’ve always worked on trust. We would never think of taking what belongs to someone else. We expect the same of our employees and vendors. But maybe we need more than a handshake.

THOUGHTS OF THE DAY: Agreements in writing define the rules of engagement. The best defense is a good offense. When you work on a written agreement, make sure you put together something that’s enforceable. If you’re planning on buying a business, get a noncompete from the seller and make sure that all of their noncompetes can be enforced.

Most entrepreneurs are good offense players. They see an opportunity and go for it. But they tend not to be so good on defense. As a result they end up trusting that things will work out, don’t bother to cross their “t’s” and dot their “i’s” and leave their businesses exposed unnecessarily.

Pay attention to the details of how your company works with others. Put understandings in writing. Ask outside advisers, especially attorneys, to advise you. Even if you don’t like the legal advice you’re getting, pay attention to it. And if asking to put something in writing is likely to queer a deal, avoid the risk altogether. No matter how enticing an opportunity looks in the moment, inability to sign a written agreement is a serious warning sign.

When it comes to employment agreements, get them in writing upfront and then do everything possible to build goodwill and incentives to work together.

Schedule bonus payments over time, with a caveat in your agreements that employees and vendor-partners must be working for your company and in good standing to receive their bonuses. Treat employees well and help them achieve what they want, and most will try to protect you in the future.

Do extensive background checks before hiring. Look for ethical breaches. If someone is coming to your company offering to bring you a competitor’s accounts, that same person may turn on you someday.

To be enforceable, a noncompete has to pass several tests, including:

  • Geographically restrictive, but not too restricting.
  • A period of time, but not too long.
  • Signed upfront or otherwise signed in exchange for a benefit.
  • Fits within the laws of the state in which the employee works.

As your business grows, it will be important to have good legal representation, so get a law firm signed up now. Hire one that has successfully defended its agreements. Follow their advice even if you don’t like it. If there’s a question, get a second opinion.

Make it policy that all new employees sign a nondisclosure, noncompete agreement. You’re going to have to make it worth your current employees’ while to sign a new agreement. Keeping their job isn’t good enough. Increase benefits, add a 401k, increase responsibility and compensation ­— check with your law firm on what might be deemed sufficient.

Considering buying another firm? Make sure the owner signs a noncompete. But beware that the seller’s employees could also strike out on their own. Offer signing bonuses and employment sufficient to get them to sign your company’s documents.

LOOKING FOR A GOOD BOOK? Try “Negotiating and Drafting Employment Agreements: Leading Lawyers on Constructing Effective Employment Agreements.”

Andi Gray is president of Strategy Leaders Inc., a business-consulting firm that teaches companies how to double revenue and triple profits in repetitive growth cycles. Have a question for AskAndi? Wondering how Strategy Leaders can help your business thrive? Call or email for a free consultation and diagnostics: 877-238-3535, AskAndi@StrategyLeaders.com. Check out our library of business advice articles: AskAndi.com.

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About the author

Andi Gray
Andi Gray is president of Strategy Leaders Inc., strategyleaders.com, a business consulting firm that specializes in helping small to midsize, privately held businesses achieve doubled revenues and tripled profits in repetitive growth cycles. Interested in learning how Strategy Leaders can help your business? Call now for a free consultation and diagnostic process: (877) 238-3535. Do you have a question for Andi? Email her: AskAndi@StrategyLeaders.com. Visit AskAndi.com for an entire library of her articles.
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