Failure to File

Failing to timely file your tax returns is a crime. While the IRS seldom prosecutes, there is always the risk. This is why you do not use a CPA or one of those national collection companies. This risk requires a legal education, and substantial legal experience. It would be nice if the lawyer has experience in criminal investigations, as I do. It is also important that your communications about being late on returns and on the return drafting is covered by attorney-client privilege.

Being late is not uncommon. I see it frequently. The usual reason is procrastination. Don’t be ashamed of this condition, just get things right with the IRS, now that you are ready to deal with this. I also see circumstances of avoidance, because you do not have the ability to pay at the time. Wrong move, but let’s fix it now.

Let’s now focus on the return drafting itself. If it has been years since you filed, you may not have any records. I can help with that; all is not lost. Left on your own, you would report a lot more taxable income, than you would if you had help.

The common consequence of filing those returns is a payment problem. If the return you file is several years back, you are facing penalties that are about half of what you owe in taxes. And interest, while the rate is low, becomes substantially more when the several years have in past. You face the collections division of the IRS. This is where we will pick up in my next post.

Posted in Uncategorized |

Dispute Resolution: Trial

If you attempted to settle your dispute through litigation and it failed to happen, trial may be your best option. Virtually all litigation is settled. Often, the primary reason settlement through litigation does not occur is due to substantial disagreements over the monetary amount of settlement. You think you can get substantially more or pay substantially less in a trial. Your opponent believes that he or she can get more or pay less, as well. There is a parallel path here. Each side has to weigh their chances of winning at trial. Frequently someone grossly overestimates their chances at trial. Trial may wind up costing half as much as litigation did after everything is said and done.

Regardless, here you are trying your lawsuit, to settle your dispute. Each side’s case has strengths and weaknesses. Plus, there is the element of chance and human nature at play. If you lose big, you have more chances to settle. File for an appeal. The case may settle under circumstances similar to those at trial.

Going to Trial Offers Ample Opportunities to Settle

Was the Last Offer Better than Trial?

Settlement may happen before trial, once every party makes their entire case, looks at it as a whole, and decides that the last offer in mediation wasn’t so bad. I have settled a case at docket call, the proverbial settlement at the courthouse steps.

Can the Jury Influence Settlement?

If you are trying a case before a jury, it is possible that a settlement will occur after the jury is picked. Did you get a bad jury? Your chances of success may decrease, and a settlement number changes. I have also heard of cases that settled once the plaintiff has presented their case and before the defendant has presented their case. It is also not uncommon for a case to settle after the trial, but before the jury returns a verdict.

Posted in Litigation, Negotiation |

Dispute Resolution: Litigation

In my previous blog posts, I discussed settlement through informal dispute resolution and settlement through demand letters. Today, I will discuss settlement through litigation.

The Ultimate Goal is to Reach a Settlement, Not to Enter into Trial

Many associate litigation with going to trial. Yet, less than 10 percent of litigation cases actually result in a trial. The other 90 percent are either settled or dropped before trial occurs. As such, most litigants file suit with the goal of settling the dispute – not to enter into a trial. If you cannot settle a dispute through informal resolutions or through a demand letter, a lawsuit may be your best option.

Can You Afford a Trial?

Before you make the leap into litigation, you should understand the expense of trial. If a lawsuit inevitably ends up in trial, you must be financially prepared for it. A good lawyer will walk you through the expenses and discuss your options. If you cannot afford a trial, settlement through demand letter negotiation is a preferable avenue. Personally, I have yet to encounter anyone who wanted to spend the money on a trial unless they have exhausted all other options for settlement.

Bringing Suit Proves a Powerful Point

Ideally, you file a suit to prove a point. You are telling the other party that litigation will ensue if a settlement is not reached. I have seen lawsuits thrown immediately into settlement negotiation, even through mediation, without any discovery being conducted. However, this is not the rule. Typically, some discovery does take place. In such circumstances, you must hope that the amount you will gain in settlement exceeds the expense of discovery. Always keep this mind, as discovery is expensive.

The Settlement Process

If settlement is not discussed early on in the litigation process, it typically leads into a mediation forum. During mediation both parties are forced to exchange settlement offers repeatedly. Many mediation forums result in a settlement agreement on the spot. However, some attorneys and/or parties want to gather all of the evidence before coming to a settlement decision. This means mediation may take place both after the discovery process is over and just before the preparation for trial. Obviously, this is a course of action for a lawsuit in which larger amounts are at stake.

Next Time…

In my next post, I will discuss trial as the final form of dispute resolution.

Posted in Litigation, Negotiation |

Dispute Resolution: Demand Letter Negotiation

My previous post was about informal negotiations in dispute resolution. Today, I want to talk about negotiations through a demand letter. If you were unable to reach a compromise through informal negotiation, sending a demand letter to the opposing party is a great next step in dispute resolution.

When Should You Send a Demand Letter?

Depending upon the nature of the dispute, the severity of the consequences that may occur when the dispute is resolved, the circumstances around the dispute, and the personalities of the parties, sending a demand letter may be the right thing to do. It is important to speak with a lawyer regarding your specific case.

What are the Benefits of Sending a Demand Letter?

If a lawyer is assisting you in negotiations, he or she will prepare and send the demand letter to the receiving party. What is the advantage of doing this? By sending a demand letter, you set forth all of your legal claims that you would use in a court setting. The receiving party may think that you will sue if the dispute is not resolved within the demand letter stage. This may make the receiving party more inclined to reach a compromise outside of court.

What Does a Demand Letter Look Like?

If your idea of a demand letter comes from the movies, you may be disappointed. In a good demand letter, all claims are presented, but there are no histrionic threats. Nor is there ugly language. An experience lawyer knows if the letter is later shown to a jury, dramatic and overly aggressive language may prejudice the jury against you. A good lawyer knows how to be serious and aggressive, without making you look bad.
A party who did not take you seriously in your effort for informal negotiation will take you seriously after you have sent a demand letter. They will likely be more willing to negotiate, instead of just ignoring you or being polite after your informal effort.

Posted in Negotiation |

Dispute Resolution: Informal Negotiation

There are four forms of resolution of a dispute in, for instance, a contract dispute. First, there is an informal negotiation between you and the other contracting party. Second, there is negotiation after a demand letter has been sent by your lawyer. Third, there is litigation, followed by a settlement, achieved informally between the lawyers or through mediation. Fourth, there is trial of the dispute.

Informal Negotiation

In this blog entry, I discuss the first form of resolution: informal negotiation. Let’s say that the contract is executory—neither side has fully performed all of his/her’s side of the contract. When neither of you has fully performed what you were supposed to do, there is an opportunity to negotiate informally. There may be two different forms of dispute: what a default in performance should cause to happen, and what a term of the contract means. Frequently these two forms are merged into one dispute: one party does not perform due to a difference in opinion about what a term of the contract means. One party’s performance or non-performance is, in the eyes of the other party a default.

Everyone knows the advantage of negotiating informally. You may be able to resolve a dispute without lawyers getting involved. Common opinion is that lawyers create more of a dispute than is necessary, and make resolution more difficult. And they cost money. Regardless, I support informal resolution when it is possible.

However, informal resolution works better when you have a lawyer advising you. You do not want to “give away the farm.” The lawyer’s purpose is to inform you of the strength of your legal position, so that you know how far you can push the other party. The lawyer, being a very experienced negotiator, can advise you on what you should do next in your negotiation with the other party. And your next step, after the other party has reacted. Let’s hope that you can reach an agreement with the other party. How do you document your agreement, and what should be in the document? Once again, your lawyer advises you, and may even give you a rough draft of a very informal document.

I have plenty of successful experience advising clients with respect to this informal negotiation to resolve a dispute. If you are unsuccessful at this step of dispute resolution, we can take the next step together. I’ll discuss the second step of dispute resolution in my next blog entry.

Posted in Uncategorized |

Boilerplate Revisited

My previous blog entry was devoted to a brief explanation of the use of boilerplate in contracts. I explained some of the basics about some boilerplate provisions, and showed why they made a difference.

Some boilerplate can be enforceable, and, in at least one instance, may, or may not, be enforceable. In my previous blog entry, I discussed the choice of location where a suit must be filed, and the consequences that may flow from such a choice. I said that big companies usually succeed in getting the location near them. But my comments on location should be examined further.

Boilerplate: Location

There is a diversity of citizenship in some suits. All this means is that the parties are located in different states. These diversity suits are occasionally filed in federal, not state, court.

Sometimes, an argument gets advanced that the choice of location provision can be ignored by a federal judge, and that the judge can determine where the suit should be located. The reasons might include fairness to the parties and convenience, in the sense that all of the evidence and witnesses are located in one place, which is not the big company’s location, but the small company’s location. The federal appeals courts are divided as to whether the judge has that power.

If, in your case, the judge has that discretion, the choice of location clause in your contract may not be enforceable.

Posted in Uncategorized |

Contract Boilerplate

What is a Boilerplate?

You might have heard of a “boilerplate” before. Boilerplate refers to the miscellaneous provisions in a contract which are in every contract. However, boilerplate provisions do vary from contract to contract, and the terms of a boilerplate provision may vary. So, the issue in boilerplate provisions is the content that you want for each provision. The content of some provisions is negotiated between the attorneys. I am going to focus on one boilerplate provision that will provide an example of how important the terms of a provision can be.

Boilerplate Provisions:

Usually there will be a litigation provision. This boilerplate provision can have huge implications. It states where a suit will be filed, if one becomes necessary, and which state’s laws will be used.

Location of a Suit

If you have two parties that do not do business in the same county, the location of a suit will result in some additional expense of the litigation for one party. More importantly, it determines the inclinations that the judges may use during the litigation. For instance, some counties are known to be very conservative, and as such, the judges in that county are more likely to be conservative. There are exceptions, but generally this can be true. There are many considerations that have to be used to determine the likely nature of the judges, but location of the suit is a very important factor. The same can be true with respect to juries. For instance, if a county is very conservative, the jurors may be conservative in deciding who wins, and how much the other party has to pay.

The location of a suit can even be more important, when the parties to a contract live in different states or countries. The travel expense can be large. The expense of learning the tendencies of judges and juries can be large, if this can be done at all. When the location is picked by one party, that party will likely know the local factors that may affect who generally wins, and who generally loses. You will not.

Choice of Law (Which State’s / County’s Law Will be Used?)

The second term in a litigation provision is the choice of law. Which state’s or country’s law will be used in determining the outcome of a litigation? The law does vary from state to state, or country to country. Choosing between Texas law and New York law can be a very important decision. You know Texas law, but you do not know New York law.If the choice of law is not made by the most powerful person in the negotiation of the contract, it pays to know something about the other state’s laws, before a decision is made.

Pay Attention to the Terms of a Litigation Provision

And the terms of a litigation provision are very important. I frequently see clients who never thought a contract would be broken, encounter a serious breach of the contract. The question is whether to litigate. If the party who breached has its own location and the use of its own laws, a big question arises as to the cost of the litigation, and, more importantly, who is likely to win. When you are likely to win, a good settlement is easy to reach.

Posted in Business Contracts, Litigation |

How to Negotiate a Contract

Many books have been written, and many seminars have been given about negotiation. Personally, I like to keep it simple. Negotiation is horse-trading; it is about power. If you are the only supplier of a product that a buyer needs, then you have the power and the ability to get most all of what you want inserted into the contract. The reverse is true, as well. If there are many suppliers of the product, the buyer has the power. When there are many suppliers and many buyers, negotiation is an art form.

For the purpose of this blog post, I will assume the last circumstance in which there are many suppliers and many buyers. In this circumstance, each side may get some of what they want, but no one will receive all of what they want. There may be agreement on many of the terms of the contract. However, the other terms where there is a polite conflict of goals, you must evaluate which terms can be traded, and which cannot be traded.

Draft the Contract

While you may want to determine the elements of business contract — the who, what, when, and why (see my previous blog post for more information) — on your own, many terms will not be negotiated until a written contract is submitted. Whichever party drafts the contract will likely include many terms which are favorable to their own party.

Identify the Terms Which are Worth Negotiating

At this point, in review of this contract, your attorney should identify the terms which are worth negotiating, hopefully evaluating the terms with you. After all, you are the client and the boss. Plus, you understand the buyer/seller on a personal basis, and therefore you understand what decisions the buyer/seller may make. Your attorney has no working knowledge (expect based upon considerable experience) about what objections the opposing attorney may make, separate and apart from his or her client.

Discuss Areas of Conflict and Come to an Agreement

Now, you receive a draft. By and large, your changes to the terms will be made by a revision of the contract, which is returned to the other party’s attorney. There may be a few exchanges of drafts. Often, three exchanges are made before all of the terms, and the wording of each term, is agreed upon. It is common, after the first exchange, for both of the parties’ attorneys to discuss the terms which are the subject of conflict. The second exchange should result in an agreement of terms, but sometimes it does not. Words can be important, as there are many aspects to a term of the contract. You attorney should iron out any differences in wording in order to protect you. This is a mini-horse trade. Wording, and the consideration of mini-terms, may be the difference between a successful suit on a breach of contract, or a failing one.

Examples of Negotiating a Contract

Now, to give a few examples. I encourage you to read my preceding blog post on the elements of business contract, so that you can understand more precisely the alternative terms for the basic elements of a contract.

A seller will want the buyer to include its principal, personally, to be listed as a buyer. Of course, the buyer will want the opposite. As mentioned before, this negotiation is all about power. You may succeed in getting the principal to guarantee a terms of the contract, such as payment. But, this is not certain. It all depends on the power.

Payment is a major term. Hopefully, both parties have agreed upon price before turning the matter over to an attorney for advice and negotiation strategy. Frequently, a major term is whether you will be paid before, or paid after the product is delivered and inspected. As a seller, you will want to negotiate for the “paid before”, and hope that you can get a compromise, such as half up-front, half after inspection.

If the product takes some time to manufacturer, but the buyer needs it quickly, you should negotiate for a compromise on delivery time. Insist on your time period, and when the other party counters with its time period, counter with a compromise, which itself may come to be negotiated. If you cannot get a compromise, the buyer may go to someone else to make the purchase.

Next Time…

In my next blog post, I will discuss “boilerplate” and why its content may make a difference in your contract.

Posted in Business Contracts |

Elements of a Business Contract

This will sound like a middle school English class — but, you must be able to specifically address the who, what, when, and why to have the basic building blocks of a business contract. I have encountered many clients who did not have all of these aspects pinned down. In these cases, I would counsel them, and either send them out to discuss the contract further with the other party, or negotiate the rest of these basic terms for them.


The “who” is obviously important. To draft a business contract, I must know whether you are dealing with an individual or a company/organization. Want must be specific and precise about the names of those involved. To identify the involved persons even more precisely, we want to document their address or state of origin. Personally, I like to have both the company and the individual named as parties in the contract, to ensure their involvement in the contract.


The “what” goes to the heart of the deal. What is the party going to sell? What is the buyer willing to pay? Again, we want to be precise, so a detailed description of what is being sold must be stated in the contract. You do not want the other party thinking that they are going to get more than you have agreed to deliver. The “what” is where you catch any misunderstandings about the deal. And what are the terms of payment? You need to know not only how much will be paid, but when that amount will be paid.


This feeds into the “when” of the contract. When is the product to be delivered? When will the payment be made? Does one party order the product from the other? If so, by when? When does the contract start? When does it end? There are plenty of “whens” in a contract.


“Why” gives details about many other things that need to be in the contract. Why are you getting into the contract in the first place? Why are you willing to give the other party payment terms that include credit? Not only does “why” lead to other terms that need to be stated in the contract, it also lends itself to critical thinking about the deal that you are making, and whether some contract terms need to be further negotiated.

Next Time…

In subsequent posts, I will address some examples of negotiation of terms, and just what does “boilerplate” mean.

Posted in Business Contracts |

Negotiating Covenants Not to Solicit & Not to Disclose

In my previous blog entry, I discussed the key areas of a covenant not to compete that need to be negotiated, and how to negotiate them. Today, I will discuss the key areas of negotiation in covenants not to solicit and covenants not to disclose; if you are unfamiliar with these two covenants, I recommend following the links to read my past posts on the subjects.

Negotiating a Covenant Not to Solicit

With respect to a covenant not to solicit, often there will be little to no effort by the seller of the business to contest the buyer’s wording of this covenant. The general thought is “I am retiring”; this thought is prevalent even among persons who can work for another 20 years (such as the 50 year old). However, only so much golf can be played. Going back into business likely means going back into a business that is just different enough from the business sold as to avoid a violation of a covenant not to compete. Doing something you know, but slightly different. Many of your old employees have skills that can be valuable in your new endeavor.

The key factor to negotiate in a covenant not to solicit is the length of time within which one cannot solicit. This usually falls within one to three years. Much more than that, and you will run into the Texas common law on restricting an employee’s right to work. Another feature to negotiate is the situation in which an employee comes to you for a job, even though you did not attempt to recruit him or her. If this clause is in the buyer’s draft of the covenant, I recommend arguing for a term that is shorter than the one for solicitation. And you know what argument I will use: chilling an employee’s right to work. You should also attempt to negotiate the definition of solicitation.

Negotiating a Covenant Not to Disclose

In the past, I often did not find covenants not to disclose in the deals I helped to draft or negotiate. However, this circumstance is becoming less and less frequent.

With respect to a covenants not to disclose, it is important to negotiate the definition of the term “confidential information”. If you are a seller, this term should be limited in scope. The definition of “disclose” also has to be negotiated; there should be exceptions for certain circumstances of disclosure (i.e. the information having been previously disclosed by the buyer). For the seller leaving retirement, it is almost impossible to do so without using confidential information in building his or her new business. After all, the seller generated the knowledge in the first place, and you cannot tell someone not to use the general knowledge he developed in his prior business experience. But, this is precisely what a broad definition of “confidential information” means. I do the best I can to limit the scope of this definition. Ultimately, my client will use some of the information that is still protected anyway. Then I rely on the fact that proving the use of the information, and the value of the information, is difficult.

Posted in Business Contracts, Buying or Selling a Business |

Negotiating Covenants Not to Compete

To continue my previous discussion of buying and selling a business, I will now discuss several covenants that are typically written into a contract, and which need to be negotiated. If you have not yet read my previous posts, you should reference both blog posts. The first examines the process of buying a business, and the second examines the process of selling a business.

In this entry, I am going to discuss the negotiation of the terms in a covenant not to compete. If you are unfamiliar with a covenant not to compete, I recommend reading a previous blog entry of mine which examines the topic; you can read that entry here.

Three Aspects of Negotiation in Covenants Not to Compete

The reasoning behind a covenant not to compete when buying or selling a business is fairly simple. The seller of the business finds a potential buyer. However, before buying the business, the buyer may arrange an agreement which restricts the seller from operating a similar, competing business within a specific area and for a specific length of time. This will protect the buyer from losing potential customers to the seller.

Thus, within this covenant, there are three key aspects that must be negotiated: the competition, the length of the covenant, and the geographical area the covenant applies to.

Competition in a Covenant

What does the word “competition” mean in a covenant? One can compete in many different ways. The main purpose of a covenant not to compete is to prevent competition between your own business and the business of another person in the marketplace. Losing a sale because a similar business was chosen, instead of yours, is the essence of competition.

Within the covenant, what exactly is considered off-limits in terms of competition? It is understood that any portion of the existing business at the time of purchase and sale of the business is off-limits. However, you could also include any element of the business or any product of the business that is simply being considered for potential production and sale. As a buyer, it is important to tie the seller to a list of such potential elements if possible. Enforcing a covenant not to compete between your potential products and the seller’s products is very difficult when one must prove that the seller did not think of it, before closing.

Length of a Covenant

There are statutes on the books with respect to the reasonableness of the length of time that a covenant not to compete can be enforced. Obviously, the length of time that a buyer wants is as long as possible. The seller will likely agree to a reasonable length of time which is necessary for the buyer’s business to be solidly in the marketplace. Of course, that length of time is subject to opinion and negotiation. In my own experience, I have seen negotiated covenants not to compete from one year to five years. Three years is typical.

The Area of a Covenant

There are also statues on the books with respect to the area in which competition may not occur. This area typically includes at the very least the area in which the seller’s business is being operated at the time of closing. One can negotiate as to what this area is.

Obviously, the buyer will want a no competition clause in as broad of an area as possible, and at least the area in which the buyer plans to expand. It is not unusual for the defined area to include areas where sales are occurring, plus additional counties that are close by. Or even the states that are close by. But you must be careful. Saying the “USA” when only a few states are involved may be stricken by a judge.

Next Time…

In my next entry, I will point out the key points in covenants not to solicit and covenants not to disclose that should be negotiated.

Posted in Buying or Selling a Business |

Selling a Business

The best way to complete a discussion of how to buy a business, is to discuss how to sell a business. If you have not yet read my blog post about buying a business, I recommend you do so for reference.

Representations & Warranties in the Sale of a Business

There are aspects in selling a business which are in direct conflict with what a buyer wants when buying a business. This situation calls for a negotiation of the extent to which Representations and Warranties are made: are they to be thorough, or limited in scope? You need an attorney with experience in drafting purchase and sale contracts, and, even better, who has experience in litigating the consequences of alleged violations of the Representations and Warranties.

When a buyer inspects a business to determine whether to buy, the buyer will address many of the same circumstances that are covered by the Representations and Warranties. Typically, the buyer will ask questions about the business. While the seller will tell the truth, it is also important that the seller is careful to give complete answers. Sellers should not be tempted to conceal negative facts about the business. Otherwise, the seller may find himself or herself in the midst of a lawsuit. Of course, the buyer wants broad Representations, to catch what the seller did not mention, and to get what the seller said in writing. On the opposite side of the coin, the seller wants narrow Representations, as the more the seller says, the great his or her chance is for unintentional error.

There is some safety, however, in adding a certain provision to the purchase and sale contract. These provisions may state that the buyer may not rely on anything said or written before the contract was signed. The Representations and Warranties are the sole basis for litigation. What is in the contract is enforceable. What is a different, pre-contract representation, or omission, is unenforceable. This is especially important when the buyer alleges that the seller committed fraud in the pre-contract representations.

Next Time…

My next post will discuss other aspects of selling a business, such as covenants not to compete, not to solicit, and not to disclose.

Posted in Business Contracts, Business Transactions, Buying or Selling a Business |

Buying a Business

If you want to buy a business, there is no substitute for a thorough, detailed inspection of every matter related to the business in question. Parts of the inspection will be to review written materials; parts of the inspection will be visual; and parts of the inspection will be conversational.

However, do not completely rely on what the seller of the business tells you. If you are given access to the employees of the said business, talk with them about it. The seller’s goal is to make his or her business look as good as possible to potential buyers. As a buyer, your goals are entirely different — you want to find out the flaws of the business.

Representations and Warranties in a Contract

However, for any flaws that you do not find, there are ‘representations and warranties’–the heart of your purchase contract. The representations and warranties in your contract guarantee that there are no flaws (other than those disclosed in writing) with respect to each aspect of the business. A good lawyer will see that you have the seller make solid representations and warranties in your contract.

That said, representations and warranties are no substitute for your initial inspection of the business. You really should complete a thorough inspection before signing a contract. You want to discover any negative aspects or flaws before signing the purchasing agreement.

Buying a Business with Prohibitive Covenants

You should also get prohibitive covenants when buying a business, such as: a covenant not to compete, a covenant not to solicit, and covenant not to disclose, from the seller. I have discussed each one of these covenants in preceding blog entries; click the links to read the corresponding entry.

Next Time…

I will have more on buying a business in my next post.

Posted in Business Transactions, Buying or Selling a Business |

Covenants Not to Disclose

Covenants not to disclose are frequently used in conjunction with covenants not to compete and covenants not to solicit. (Please follow the links to read my previous blog entries on these topics). Typically, in a circumstance in which all three covenants are used together, there is an individual who is either a key employee hire, or a key employee leaving.

Unlike a covenant not to compete or a covenant not to solicit, a covenant not to disclose can be open-ended and remain in effect as long as the information remains confidential. In my prior posts, I have pointed out the fact that these other covenants must be limited in term to a certain number of years. A covenant not to disclose is the only true way to prevent others from competing with you; it denies others the opportunity to share confidential information and use it to compete against your business.

How is a Covenant Not to Disclose Used?

Still, covenants not to disclose may be used alone. For example, “nondisclosure agreements” (a type of covenant not to disclose) are used in certain circumstances in which a potential buyer is inspecting a business for sale. In this situation, confidential information of business is passed on to the potential buyer for the purpose of the inspection. This is crucial because companies do not want confidential information shared with competitors; the covenant not to disclose is an agreement which prevents such a thing from happening.

Trade secrets provide another example for the use of a covenant not to disclose. Trade secrets provide only partial protection of information. Under the law, this status (that of a trade secret) can only be conferred in certain circumstances. A covenant not to disclose can include a more substantial amount of information that is to be kept confidential, even if it cannot be treated as a trade secret.

Of course, in some circumstances, a company selling their business may also want to acquire a covenant not to solicit and a covenant not to compete from a potential buyer. However, when used in conjunction, the covenants not to compete and the covenants not to solicit are typically not as comprehensive.

Posted in Business Transactions |

Covenants Not to Solicit

While a covenant not to compete can prevent a leaving employee from competing with you, using all of the information you gave him and all of the skills that you taught him as an employee, there are still some risks when an important employees leaves.

Companies build up a huge investment in finding, interviewing, training, teaching, and paying employees. What would it cost to do this again, because someone took some of your employees? Moreover, the cost of interruptions in a company’s operations is substantial, because there are key functions that are not being performed while the replacement employee is found and trained. There is a loss of productivity and profits.

But the bottom line is the value of the network between a company’s employees. Their interactions as a team are learned. They have to learn not only their functions, but also the functions of those with whom they interact. And there is the personal side of things. You learn how each other works, and how to interact with them as people. When the network breaks, due to the loss of a few employees, profits go down dramatically. And, while it takes time and money to get a new employee, the time to repair a network is even more of a problem.

To prevent a leaving employee from recruiting part of your team and network away from you, you must have an ironclad covenant not to solicit. With one in place, the leaving employee is liable in damages if he or she tries to hire any of your other employees. On occasion, this covenant will include a provision that the leaving employee cannot hire any of your employees, even if you do not solicit them, and they simply come to you, and apply for a job. No hiring them.

This covenant can be particularly important if the leaving employee competes with you. If you cannot prevent the competition on a covenant not to compete, you can slow them down by barring your network from migrating to her or him.

The longest period that I have seen for a covenant not to solicit is three years. Generally, you see one or two year covenants not to solicit, to avoid possible legal ramifications of a restriction on your employees’ employment options. When you have your covenant not to solicit written, do not have a period longer than two years.

Posted in Business Contracts |