Given the nature of my practice, I routinely encounter sale of a business non-compete issues. I handle these on both sides: On one hand, you have buyers who want to pursue action against the seller for allegedly violating the non-compete. On the other hand, you have sellers trying to get back into the market by any means necessary. Having seen dozens of these situations, I’m shocked at how sloppy these transactions are (on both sides).
In these transactions, I generally see purchase prices of anywhere from $500,000 to $20 million. The seller is invariably a small, privately held and often family owned business. The buyer is often a somewhat bigger privately held business. It stands to reason that if you are going to engage in a transaction where there is $10 million or so at issue, then you should have the right people giving you advice. That’s simple guidance but lots of people don’t follow it. I see bad transaction documents put together by some random general practitioner. And more often than not, whoever put together the contract doesn’t have a litigation skillset and so cannot spot half of the possible issues.
The upshot: Here are the people you need in a sale of a business transaction of this nature: (1) Transactional Person: This person should have experience asset purchase agreements and ideally will also have a solid tax skillset (for allocation purposes). (2) Tax Person: Your accountant. Even if the Transactional Person is great, you should have your proper CPA involved. (3) Litigation Person: This is where so many people mess up. Transactional people may structure deals and write the contracts. But guess who clean up the mess when things go south? That’s right. Litigation people. You want a Litigation Person who specifically has experience with non-compete issues. Why? Because on the seller side, you want to structure the non-compete so the restriction is as minimal as possible. And on the buyer side, you want to structure the non-compete restriction so its as aggressive as possible. After that, you want the Litigation Person to do a basic review of the whole transaction and issue spot for any exposure/potential liability.
Bottom line: Most people do not adequately protect their interests in a business sale transaction. Get appropriate transactional, tax and litigation advice. This issue is not limited to small, privately held companies. It even happens to the big boys: When Barclays purchased Lehman Brothers’ assets out of bankruptcy, Lehman turned around and screamed that they got a raw deal. So do it right on the front end and you’ll save yourself a ton of risk/money/exposure on the back end.
Jonathan Pollard is a competition lawyer and the principal of Pollard PLLC. Pollard has extensive experience litigating non-compete and trade secret cases. In addition to litigation, Pollard routinely advises clients in connection with the purchase and sale of commercial interests. For more information, his office can be reached at 954-332-2380.
