Why Small Business Owners Should Use Non-Compete Agreements

Small business owners are many times reluctant to use employee non-compete agreements because they have to few employees and do not want to pay an attorney to draft the required legal documents.  The term non-compete agreement refers to a restrictive  legal document that prevents a former employee from engaging in certain business acts for a prescribed period of time in a specific geographic area.

The reasons small business owners should consider  the use of non-compete agreements are as follows:

1. Protect The Value of The Business :

When a buyer considers purchasing a business , he or she wants to be confident that key employees with access to customer relationships  will not leave and  be able to take customers to a new employer.  A valid non-compete agreement signed by key employees can minimize the chance of this happening and preserve business value.

2. Deter Competitors From Hiring Key Employees :

Training employees is a worthwhile expense and may help attract talented employees and a non-compete agreement can place competitors on notice  that you are ready to protect your investment in the training of employees along with the customer relationships these employees have made during the time they have worked for your company.Courts commonly have recognized that employees have a legitimate interest in protecting their investment in specialized training.

3.Enhance Client Relationships :

When clients entrust their personal  and business information to your business they have a reasonable expectation that your employees will not share this information with another business should a key employee leave  your employment. Requiring key employees to  sign a non-compete agreement is one way to prevent former employees from the sharing of confidential information about your customers with their new employers  and gives current customers confidence that their information will remain safe.

4.Limit the Cost of Potential Litigation:

While no signed non-compete agreement can eliminate  costs associated  with legal action against a former key employee, careful crafting of this document can help minimize legal costs. Signed  employee non-compete agreements are a great opportunity to reach agreements with key employees about the circumstances that will apply if litigation becomes necessary such as recovery of legal fees if you prevail in a court action against your former employee.

As you can see there are significant advantages for small business owners to consider the use of non-compete agreements for their key employees.Remember Ben Franklin once said an ounce of prevention is worth a pound of cure!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lost Profits and Lost Business Value-What is the Difference

Damage remedies  focus on lost profits and lost business value with such remedies calculated by financial experts. Although lost profits and lost business value are common calculations in business litigation, there are distinct differences between these two remedies.

A fundamental difference between lost profits and lost business value is the expected duration of the loss. Lost profits are a measure of damages when a business continues to operate but has reduced income. The damage period is limited with the measurement of the lost profits calculated for a period until the business recovers the profits that would have occurred ” but for” the alleged damaging act. While lost business value occurs when a business ceases all operations or losses a segment of a business caused by the alleged damaging act. The damage period is into perpetuity as the business earning capacity is permanently lost.

The difference between lost profits and lost business value may appear simple but the underlying facts and circumstances of each business litigation can be ambiguous. In many cases, the extent to which a business will recover from the alleged damaging act is not clear at the time damages are calculated and the financial expert must make a determination based on the best available evidence. Additionally, the consideration of mitigation  adds to the complexity of lost profits and lost business value calculations as the plaintiff generally has an obligation to mitigate to limit their losses and the defendant has the burden of proving mitigation of losses has occurred.

The financial expert must also consider the the definition of value where the alleged damaging act occurred when calculating lost business value. Different standards of value can cause significantly different value conclusions which can be rendered meaningless by the court if it conflicts with state law .

The misunderstanding of the differences between lost profits and lost business value can lead to damage calculations double counting income in both lost profits and lost business value calculations. Although laws vary by jurisdiction, all courts agree that the double counting of lost profits and lost business value damages are not allowed. However this does not prevent a damage remedy counting lost profits and lost business value where each covers a different time period.

It is important for the financial expert witness to have a thorough understanding of the complex relationship between lost profits and lost business value and to prepare a relevant report with a reliable opinion  to withstand a court challenge and to prevent his or her opinion from being excluded .

 

 

 

 

Owner Disputes & Buy and Sell Agreements

Owner disputes many times involve a minority shareholder or business partner who disagrees with decisions made by a controlling owner. These disagreements can become significant and unable to be resolved without time consuming and expensive litigation. This can become a major distraction for company management and have a negative effect on business value. Often this will only be resolved by the minority shareholder or business partner leaving the company.

Most shareholder or business owner disagreements often could have been resolved before litigation had a buy and sell agreement been in place. Business valuation professionals can play a significant role in helping business owners and their attorneys draft provisions in these agreements that can be helpful in resolving disputes and preventing the likelihood of time consuming and expensive litigation.

Key business valuation provisions in these agreements would describe the following:
1. Establish procedures to determine share or owner value.
2.Describe situations when a shareholder or owner is allowed or required to buy out the the shares  of another shareholder or owner.
3. Set guidelines for the hiring of and outside business appraiser and specify business valuation components such as  standard and premise of value, the date of valuation, and the use of valuation discounts.

 

Each of the above components can have a significant impact on the conclusion of value when applied in an inconsistent manner and having them clearly defined in an agreement can minimize the likelihood of a disagreement over share or owner value

Be aware that when a properly prepared buy and sell agreement is not in place, shareholder and owner disputes can continue for months and years  due to complex statutes and case law in states where a business operates.

 

 

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