Selling a Business Part II: Are Your Employment Contracts Up-to-Date?

In the first part of our series on preparing a business for sale I looked at the steps business owners can take to make the transaction faster, smoother and more lucrative.

Often, one of the first things a potential buyer will want to examine are the employment contracts for the key personnel within the organization.  This is especially true for any knowledge based business where buyers are acquiring far more than the tangible assets appearing on the balance sheet.

As part of its due diligence a prospective Purchaser must assess what it is actually acquiring. It is essential for the Purchaser to conduct due diligence in relation to employment agreements, non-competition, non-solicitation and/or confidentiality, non-disclosure agreements and other such documents intended to protect the proprietary rights of the target business. A Purchaser wants as much assurance as possible that the know-how, knowledge and intellectual property of the target can’t simply walk out or be enticed out the door to a competitor the moment the Purchaser takes over.

Having comprehensive and up-to-date employment contracts is an essential part of the documentation Sellers must prepare and make available to a Purchaser.

In the preparation and/or review of such documents, it must be remembered that employees cannot be denied a right to earn a living. There is a delicate balance.

In Ontario today, it is well established that restrictions exceeding what is reasonable, in the circumstances, to protect proprietary rights are non-enforceable. Generally, non-solicitation clauses are preferred over non-competition clauses where the non-solicitation clause would adequately protect.

Contracts that are viewed by the our Courts as too restrictive either as to scope of activity restrained, the temporal or spatial application are simply unenforceable.

Whether you are the Purchaser or the Seller, in reviewing or up-dating such agreements consider:

  • The rights the employer is entitled to protect; and
  • Whether the covenant is limited to trying to protect those rights.

Remember too that in up-dating such agreements, consideration must be given to providing for the appropriate financial consideration to the employee(s) that may be required in the execution of the agreement.

Don Burke