Should a noncompetition clause be included in the agreement?
Noncompetition and confidentiality covenants are very important as they prevent competition from owners both during and after the period of ownership. The specific details depend on the particulars of the business, and it is not uncommon for restrictive periods to last after departure for up to five years. Further, confidentiality covenants often protect business information indefinitely.
What are the consequences of not having an agreement?
If a business owner is not acting as required, then, absent an agreement with well-defined parameters as to the expectations of the owners, it becomes much more difficult, if not impossible, to correct the failures of a non-compliant owner, or, if necessary, remove the owner from the business. Further, without an agreement with buy/sell provisions an owner may transfer some of his or her equity to a spouse, child or other third party. Thus, in either instance, the absence of an agreement may cause the other owners to find themselves trapped in a business with people they never intended, with no way to correct the problem. This often results in an ugly lawsuit, or corporate divorce. Conversely, a properly drafted agreement states the terms upon which an underperforming owner may be removed from the business, and clearly defines the persons to whom an owner may transfer equity.
What would you say to someone who argues that he or she doesn’t need an agreement?
When the business begins, capital is short and business owners are trying to save money in order to spend what little they have on the growth and development of the business. I understand that, but as the saying goes, ‘An ounce of prevention is worth a pound of cure.’ They may say, ‘We’ll do it at a later date,’ but too often the later date is too late.
It is better to spend a little money upfront, get something in place, and then when the business becomes more successful the owners can always go back and amend the agreement. Comparatively, the amount of money typically spent attempting to unravel bad situations between disputing owners without an agreement almost always far exceeds the amount of money that would have been spent to create an agreement on the front end. It is best to tackle the agreement issues at the outset of the relationship because the owners’ collective interests are generally aligned at that time, whereas the further a business progresses the greater the potential for divisive issues to arise between owners, and the greater the potential challenge to get all owners to come to the table and agree on the terms of an agreement.
Aaron Lepp is a partner at Stark & Knoll Co., L.P.A. Reach him at (330) 572-1311 or [email protected].