Mark Pestronk
Q: I am thinking of selling my agency to a competitor. After I reveal information about my employees, independent contractors and clients, how do I protect myself from having the potential buyer steal them away instead of going through with the acquisition?
A: I appreciate your concern, because at least one of my travel agency clients has suffered this fate before the agency owner contacted me about the problem. After a raid, there is very little that can be done, unless you have already taken the steps discussed below.
First, you must have a well-drafted nondisclosure agreement (typically referred to as an NDA) that needs to be signed before you disclose anything. In addition to prohibiting disclosure, it must prohibit the potential buyer from using your information for any purpose other than the acquisition.
The NDA should also bar the buyer (and its affiliates, employees and agents) from soliciting your employees, ICs and clients for a defined period such as 24 months after termination of discussions, regardless of whether the deal closes. Buyers will often try to carve out exceptions for general solicitations such as employment advertisements or inadvertent solicitation by employment agencies, so try to keep these exceptions as tight as possible.
Even better, try to provide that the buyer will not even contact any of your employees, independent contractors or clients and that you, the owner, will be the sole point of contact until closing.
Next, the NDA could provide for liquidated damages for a proven breach tied to a multiple of that person's compensation or the client's revenue. A damages formula like this also deters violations, since the buyer knows there is a concrete number attached rather than an uncertain damages fight.
Since you would have to sue to obtain the damages, the agreement should also provide that you will be awarded attorneys' fees if you win the suit or get an injunction. If you and the potential buyer are in different states, you should provide that the potential buyer consents to a suit in your home state.
Second, disclose information in phases that are tied to deal progress. Give out financials and a business overview first. Save names and compensation until after a letter of intent or the like is signed and the buyer has shown real commitment. Since the business terms of letters of intent are not binding, you are still running a risk that the potential buyer could call it off and use the information for its own benefit.
By the way, some sellers want potential buyers to put up a good-faith deposit before disclosure begins, but I have never known of a buyer who agreed to do so.
Unfortunately, there is never an iron-clad guarantee that the potential buyer will not use your information to hurt you, and lawsuits can take a lot of time and money and ultimately fail. While you should always obtain legal advice about getting the best NDA and the phased disclosure process, in the end you have to go with your gut instinct and intuition about whether and how much you can trust the buyer.