Parties in mergers and acquisitions have long relied on non-compete agreements to "put handcuffs" on the seller, according an industry veteran who has been on both sides of M&A deals.
A non-compete is so essential to the transaction that it falls under the category of "Deal 101," said William Kronenberg, chairman of Professional Underwriters Corp. in Exton, Pa., during a panel discussion at the TMPAA's Eighth Annual Summit last month.
In fact, even if the principal agrees to stay after the acquisition, it's still a good idea to keep him "tied up" in some way, such as restricting his sales activities to a product line or niche, he noted. If the seller's principals are staying, it's also important to establish upfront what their day-to-day responsibilities will be, he added.
From the buyer's perspective, non-compete agreements are a must, along with confidentiality and non-solicitation agreements as a separate piece from the asset purchase contract, according to David Jordan, senior vice president and chief operating officer of Risk Specialists Companies, a surplus lines broker subsidiary of AIG.
Art Seifert, president of Dallas-based U.S. Risk Underwriters, noted that legal views of non-compete agreements vary by location. For example, the California Supreme Court recently invalidated non-compete agreements–although they may be easier to enforce if they are separate from the rest of a buyout, he noted.
Giving the private-equity perspective, Chris Lalonde, a principal at Century Capital Management in Boston, said the non-compete issue is less of a concern to PE firms, although Century Capital uses them as part of the deal package–especially if there will be a management transition. The contract length is typically two-to-three years, he added.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.