When your company is acquired, the acquirer will request that key people sign a non-compete agreement. Some acquirers can be very aggressive in asking a large number of employees to sign these agreements, often focused on sales staff. The reason they make these requests of sales staff is obvious: After a company is acquired, if the salesperson doesn’t like the new ownership, the salesperson can fairly easily take a book of business across town. As most of us know, a customer’s allegiance isn’t always to the company providing materials. The allegiance can be to the salesperson who does the problem solving and passes along favorable pricing. Losing a top salesperson can meaningfully reduce the sales revenue of the company that loses that business.
Before we get into more detail, note that there are three types of employees within most companies: 1. Company owners who become employees after the company is acquired, and after having received “consideration” (money) for the sale of the business. 2. Employees who were never owners, but who also received consideration for the sale of the business; this situation is sometimes referred to as “phantom shares,” where the employee is promised money in a sale, but never actually owns equity in the company. 3. Employees who did not receive consideration in the sale of the company but are still employed under new ownership.
For employee type 1: Owners that sold the business, got paid out, yet stay on—they are almost always subject to a non-compete. Because they received consideration for the business, the non-compete is often a requirement that is broadly outlined in the letter of intent (LOI) and spelled out in detail the contract of sale, a.k.a. the definitive purchase agreement (DPA).
For employee type 2: These employee would likely be classified as “workers” under FTC regulations. Non-competes are probably not enforceable for them.
Employee type 3: These are clearly classified as “workers,” and they would almost never be forced to sign a non-compete, even though acquirers may request that they do.
If you are subject to a non-compete, note that all non-competes should have a duration for how long they are in effect. It’s typical in the LBM sector for that duration to be between three and five years. Even if you stop working for the company, the non-compete is still in effect for that time period.
Some non-competes may also define a region where the non-compete is in effect, such as a state or a radius of miles from the company that got acquired; this can be negotiated. Some non-competes will restrict the signer to a specific role that they cannot assume at another company, so a salesperson may be allowed to work as an estimator at another company; this is also negotiable.
No matter what type of non-compete you are asked to sign, note that the state law is often the factor that determines if the non-compete is enforceable. Although each state has various types of restrictions, California, Colorado, Minnesota, North Dakota, and Oklahoma all largely bar the enforcement of non-competes, especially if the person in question did not receive consideration in the sale of the business in question.
As mentioned, it is not usual for acquirers to request blanket non-competes from key employees, no matter their status. Don’t take this personally. The acquirers are just doing all they can to ensure continuity of staff and operations under new ownership. Your investment banker should be the one to signal to the acquirer what is likely or unlikely to be accepted and why. But in the few times we have seen even the request for non-competes get to a non-owner employee, you will see immediate push back, and for good reason: The employee would not want to see their ability restricted if they want to sell their services to a higher bidder. And there’s nothing more basic than the freedom to move jobs at your own will.
