From time to time, owners will ask us if they need to sign a noncompete agreement. The answer stays the same: “Yes, Yes, Yes. Buyers will always want a noncompete.” An essential part of every practice sale/purchase is the noncompete clause or, as it is sometimes called, the covenant not to compete. This clause or agreement is essentially a protection for the buyer that spells out what a seller cannot do regarding performing accounting, tax, and related services after the sale. 

In some sense, owners are selling something that does not even belong to them—the clients—and the likelihood that those clients will return to the new owner for services. There are a variety of reasons why a client might not want to go to the buyer. But none is bigger than the scenario of a prior owner who either stays in business or who might soon return to that business. Assuming that the clients are happy with the owner and satisfied with services provided, why would they go to a new buyer if the former owner is still providing the same services? The best thing for the buyer is that the owner is completely out of the business and not even continuing to do work for any clients. A noncompete spells that out and gives the buyer some legal recourse in the event a seller does become a competitor. It is certainly hard to understand how a seller can justify selling something, in this case work for certain clients, then taking that back without compensation. Unfortunately, it does happen at times.

Courts require that noncompete agreements have limitations, usually in the form of both geographic and time limitations. A buyer cannot prevent a person from ever plying his or her profession throughout the whole country! 

Exclusions can be included if agreeable to both parties. For instance, sometimes a seller wants to be able to work as an accountant for another firm in industry or government, but not on his/her own in public accounting. That can be spelled out. Another scenario would involve an exception to a type of related work. Perhaps a seller wants to continue to do investment work but not accounting and tax services. That too can be specified. It is always important to be clear in the language.

Sometimes included as a part of the covenant not to compete or as a separate clause is a nonsolicitation agreement. While the noncompete clause prevents the seller from performing accounting and tax work in general, the nonsolicitation agreement specifically identifies that the seller will not do work for the existing clients being transferred. It can also specify that the seller won’t recommend or suggest that the clients go to someone besides the buyer. In some cases, the nonsolicitation actually takes the place of the noncompete. However, it is probably best to use both.

Sometimes, a nonsolicitation clause will spell out a penalty for breaking the agreement. For example, wording may be included so if the seller does work for or solicits work from an existing client, he/she would have to compensate the buyer 150% of one year’s gross fees from that client.

While noncompete clauses and nonsolicitation clauses are standard for the seller, the matter gets stickier when it comes to employees. Requiring such agreements from all employees or key employees before a deal can be made can get complicated. One, the employees may never have had a noncompete with the owner, so they might become suspicious of having to do one for the buyer. It may be like asking someone to sign a prenuptial agreement! Two, often the employees have not even been told of a possible sale. Three, sometimes the employees can then hold the owner hostage in the deal by refusing to sign a noncompete agreement. Four, such agreements for employees may require compensation or bonuses in order either to be enforceable and/or to entice the employee to sign them.

Buyers and sellers need to do their research into how much, if any, of the purchase price should be allocated to the noncompete agreement. There are tax implications for both parties.

But there can also be legal implications tied to the enforceability of the agreement and the “cost” of the agreement. It is recommended that both sellers and buyers engage their own attorneys regarding noncompete agreements and other legal matters associated with the sale/purchase. 

Just from the information provided, it is easy to see that noncompete agreements and nonsolicitation agreements are essential but also somewhat complicated. Please use professionals to help with your sale or purchase.