Should you have non-compete agreements for employees, and when buying or selling a business?

You’ve worked hard to build up your customer base. You’ve invested a lot of time and resources into creating your intellectual property. You may have paid a lot of money to acquire another business owner’s assets and customers.

You want to safeguard these things, which is why you probably want a non-compete agreement — or at the very least a non-compete clause that’s included as part of an employment or purchase contract. That can potentially protect what you have built.

But not everyone agrees. In fact, there’s a growing backlash against non-compete agreements, particularly when it comes to employees, across the country because some believe that these types of agreements limit the opportunities for lower skilled workers.

Several states — Washington, New Hampshire, Hawaii — are looking at legislation that makes such contracts unenforceable for certain workers.

A bill in Harrisburg — the Freedom to Work Act — would bar most non-compete agreements, except those ancillary to the sale of a business or dissolution of a partnership. New Jersey legislators have also introduced a similar bill, but it gives employers much more latitude to enforce non-compete agreements that are ancillary to employment.

“Pennsylvania courts tend much more to view non-competes as a troubling restraint that prevents ex-employees from earning a living,” said Claude Schoenberg, a Bala Cynwyd-based lawyer who specializes in employment law. “New Jersey courts, by contrast, generally accept that non-compete agreements serve a useful purpose as long as such agreements are reasonable, especially to protect trade secrets, confidential business information and customer relationships.”

Whatever their future, non-compete agreements are still an important part of most business contracts that involve the hiring of employees or the acquisition of another company. But how to make sure yours is strong? You can hire a lawyer to help you craft your next non-compete agreement or clause or you can take advantage of the resources at legal sites such as Nolo, BizFilings and LegalZoom.

Regardless, you'll want to always make sure you're including these key elements.

Compensation: If there’s a dispute, most courts will look to whether there was consideration given in return for the non-compete commitment. That can come in the form of a separate payment made to a seller of a business or specific mention that the non-compete is part of an employee’s overall compensation or that the employee is receiving additional payment, benefits, title or status at your company. Absent this, it may be determined that the non-compete clause had no value and therefore there’s no real basis to support it.

Duration: As tempting as it may be, you can’t restrict an employee who leaves your firm from working for a competitor or in the industry for the rest of his or her life. The terms of these deals aren’t written in stone, but I think a general rule of thumb is three years. It really depends on the industry and your negotiations with the other party.

“The length of the agreement is often the most heavily negotiated item,” says Michael Lefkowitz, the founder and managing partner of Benjamin Ross Group, a business brokerage firm with offices in Southampton, Radnor and Princeton. “Many courts will not accept ‘over-long’ terms or too broad geographic areas.” Like me, Lefkowitz also sees “two or three years” as common, but it’s not unusual for some buyers or employers to seek longer terms. “A term which arises from a business acquisition is usually longer than that from an employment relationship only,” he says.

Territory: Telling a former employee or the seller of a business that it’s not allowed to provide services, work for or sell products to similar companies anywhere in the world when most of your business is in the U.S. would be considered very unreasonable. You’ll need to look at your main markets and protect yourself there. Use a geographic radius – 50 or 500 miles - from your company’s place of business and consider naming certain competitors or cities if you deem them important.

Finally, consider the future. What if you want to assign the non-compete to someone else because you’re selling your business? What legal jurisdiction would be most convenient to you if there’s ever a dispute? What if you’d like to update this non-compete provision in the future because you’re entering a new market or the general dynamics of your business changes? Make sure you’ve thought through these questions and included them in your agreement. And, as Schoenberg advises, make sure you’re keeping an eye on potential legislation, as well.

It’s all well and good, but in the end and considering the growing backlash, are non-competes still worth it?

For a business acquisition, the answer is yes. But for an employee contract, it’ll come down to one thing: Does it make financial sense?

I’ve seen many frustrated clients of mine lose an employee, only to find that person selling competing products to their customers. Sometimes they go after that employee. But in most cases they wind up letting it pass. Why? Because the cost of going after that person just isn’t worth it. Fighting a non-compete dispute, like any legal battle, can take time and be expensive, and like any other expense, a good business person will evaluate the return on investment of pursuing it.

—Gene Marks is a certified public accountant and the owner of Marks Group, a technology and financial management consulting firm in Bala Cynwyd.