Q My engineers have access to all kinds of confidential information. Can I (and should I) require them to sign a noncompete agreement?

Joanne S. Hovis, Columbia Telecommunications Corp., Columbia, Md.

The more employees know about your business, the more they can help you--or themselves if they decide to set up shop across the street or light out for the competition. And with the job market tightening, that tickle you feel between your shoulder blades may not be paranoia.

Noncompetes are increasingly common, but structuring one that holds water is a challenge. There aren't many specific guidelines: As with pornography, the courts recognize a bad agreement when they see one. A narrow scope is better: For example, local restrictions are more acceptable than global ones, says Michael Shetterley, an attorney with labor and employment law firm Ogletree Deakins. Attempts to wall off too much territory--"employees may not work for any telecom company anywhere in the country for five years"--won't fly with most courts. Laws protecting employees from overly broad noncompetes vary by state. In Maryland, for example, agreements lasting one year or less will likely be upheld. Maryland courts will also "blue pencil" a contract to make it fair and enforceable; other states take an all-or-nothing approach.

But it's not just the courts you have to worry about. Draconian noncompetes can also alienate employees; you won't win their hearts by tying their hands. Pat Cooley, CEO of RelianceNet, a technology consulting firm based in Annapolis, Md., requires his whole staff to sign noncompetes but enforces them only when someone spills trade-secret beans to a competitor or makes off with clients. In the past decade, he has brought two employees to court for violating the agreements and won both times. "We don't want to block or limit anybody from being successful in the future," Cooley says, "but there are things we need to do to protect our business interest."

Some companies treat noncompetes as a way to gauge employees' intentions. Randy Cohen, CEO of Austin-based ticket distributor TicketCity.com, allows employees to decamp for competing firms or launch rival businesses, so long as they don't take important customers or staffers with them. Still, before hiring job candidates, he requires them to sign noncompetes barring them from starting a competing business within 500 miles of TicketCity.com's headquarters. "If they seem worried about signing it, they're not looking at the big picture and seeing themselves as part of the team, so you probably don't want them anyway," he says.

Cohen's right about timing: The noncompete should be included in the employment agreement, along with a nondisclosure clause. If you're asking current employees to sign one, give them something in return, such as bonuses or souped-up severance packages. That may help your case before a court and should lessen the sting for employees. After all, the last thing you want is to drive them into the arms of a competitor.

Q I desperately need to cut ties with my factor, which hands over only 80% of my receivables each month. I just landed a big client and need that 20% to pay for additional overhead. What are my options?

Richard Ryan, Netcom Installation, Group Garner, N.C.

Unfortunately your current arrangement is smack within industry norms. Setting aside 20% of receivables to insure against deadbeat invoices is standard practice for factoring companies, which pay businesses up-front for outstanding bills and collect payments from customers when they're due. Factors repay that 20%, minus fees, on a schedule agreed upon in advance. Still, you may be able to pry some of that money loose without switching horses in mid-cash-stream.

Unlike banks, factoring companies are apt to care more about your customers' creditworthiness than about yours. Your factor may negotiate the withholding rate down to 10% or 15% if your customers have good credit histories, pay on time, and aren't in the habit of returning products and asking for refunds. Certainly the prospect of that juicy new contract can only help your case.

If your factor holds firm on withholding 20%, another might be more flexible. Factoring arrangements can last anywhere from six months to several years, but most involve one-year contracts, and businesses regularly switch to get better terms, according to Jerome Reisman, partner at Reisman, Peirez & Reisman, a law firm based in Garden City, N.Y. The same rules apply: If your customers and products are solid, and you're in good standing with your current factor, you have a shot at better terms. Many factors will even communicate with one another to ensure a smooth transition. Still, warns Reisman, if you jump ship before your current contract expires, you'll probably have to pay a penalty, and a heavy fine could cancel out any benefits from the new terms. It's another factor to consider.

Q My pet accessory business is profitable, but monthly loan payments are killing me. Will all that debt make the company unappealing to potential buyers down the road?

Diana Flynn, Otis and Claude, Allentown, Pa.

Literary giants from William Shakespeare to Ralph Waldo Emerson have railed against debt and debtors, but in the real world most people won't hold borrowing against you. Just as the couple bidding on your house doesn't care about the balance on your mortgage, suitors for your company aren't losing sleep over where you got the capital to build your business as long as it's otherwise attractive.

There are many different approaches to structuring an acquisition, but debt is almost always handled in one of two ways: You, the seller, will either pay off the loans as part of the deal, or the buyer will assume the debt, figuring it into the final purchase price, according to Gary Moon, senior director of San Francisco-based investment bank Viant Group. "While a heavy debt load can beg a lot of questions about a company, the primary motivation for acquirers is that the business is otherwise attractive," says Moon.

What potential buyers will find fascinating is your earnings before interest, taxes, depreciation, and amortization charges, says Gary Topche, a CPA at Frankel and Topche, an accounting and business consulting firm based in Kenilworth, N.J. EBITDA, as it is known in polite company, doesn't take debt payments into account, and estimating it requires timely and accurate financial records, Topche warns. So, if you don't already do so, start maintaining detailed books and consider hiring an accountant to sign off on your annual financial statements. You'll want three or more years of audited financials to attract the best sale price and the most desirable buyers, whose other turn-ons will likely include solid revenue figures, profitability, clear potential for future growth, a strong, diverse customer base, and long-term contracts with clients.

Of course, if your company's loan payments are as lethal as you describe, it may make sense to pay down some debt before hanging that for-sale sign. After all, you wouldn't sell your house for $500,000 if you owed the mortgage company $600,000.

Resources

To view sample noncompete agreements, go to the CCH Business Owner's Toolkit. For more tips on what buyers want, read "What's Your Business Really Worth?" by Inc. columnist Norm Brodsky.

Looking for answers? Stumped by a thorny business problem? Let Inc. help. Send your questions to askinc@inc.com.

Published on: Jan 1, 2006