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Do you have the skills to become a business broker?


The outlook for business brokerage is very good and a successful business broker can make a very good income.  According to IBISWorld, the business brokerage industry – revenues earned on the sale of businesses at a price of $2,000,000 and under -- should surpass $1 billion in revenue in the next few years.  The improving economy, increasing number of businesses, and more business owners reaching retirement age will drive continued growth.  According to the 2013 Business Brokerage Press survey, an industry veteran should earn over $100,000.  If you like business, being a business broker is an interesting career.  You see many different businesses and management styles.  No two days are the same.  If you are thinking of becoming a business broker, here are some skills you need.

First and foremost, you need to have excellent sales skills to be a business broker.  In the typical sale of a business, you need to convince a business owner to give you the exclusivebusiness broker   young woman   Copy right to sell their business and then you need to sell the business.  We find that good b-to-b sales experience is essential for a business broker.  But, you also need to have skills in selling to consumers.  The majority of small business sales are to an individual.  You are selling the sizzle and the steak.  The buyer needs to be excited by the business and they need to see that the numbers work – that they will make an adequate income from the business.

In addition to having excellent sales skills, you need to enjoy sales.  Selling is what you will spend most of your time doing.  If you don’t enjoy it, it will quickly burn you out.

You also need to be able to work with financial statements – primarily the income statement and balance sheet – to become a business broker.  You are not an accountant, but you need to understand financial statements and recast them to show a buyer how the numbers will look to them.  You also need to understand financial statements to prepare market value reports to show an owner what their business is likely to sell for.

There are a few personality traits that will help you to be successful as a business broker.  The ability to stay calm when dealing with a tense situation is important.  Buying or selling a business is a stressful event in someone’s life.  They will take out some of their stress on you.  They are likely to become angry at the other party at times during the process.  You are a buffer between the parties.  You need to be able to resolve the differences without taking it personally.   You also need to bring reality to the buyer and seller.  Many times, they will bring unrealistic expectations to you.  It will expedite getting a deal done if you can nip these in the bud.  You also need to be able to relate to and deal with many different types of people with various ethnic backgrounds.  Another skill that will increase your ability to close deals is “creative problem-solving”.  If you can come up with creative ways to get by differences and obstacles, you will close more sales and make more money.

You need to have good communication skills, both in your speech and in writing, to become a business broker.  You spend a lot of time talking to people.  You need to be able to communicate your ideas clearly and in a manner that is acceptable.  You will also write reports and emails.  These need to be well written.  If they are not, they may not communicate what you want to say.  If poorly written, it will reflect poorly on you.

You need to be self-motivated and self-directing as a business broker.  You need to be able to schedule your time by setting your priorities.  Even if you work for a business brokerage agency, rather than on your own, it is unlikely that the owner of that company will want to micro-manage your schedule.

The final skill that I would suggest you have to become a business broker is the ability to work with technology to stay organized and be effective.  A CRM system is essential for keeping track of clients and scheduling.  A Smartphone enables you to stay in touch better and respond faster.

If you are thinking of becoming a business broker and have these skills, please contact me.  I would be happy to talk to you more about what it takes to become a successful business broker.

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5 Terms to Be Reasonable About If You Want to Sell Your Business


You may have a great business to sell, but if your selling terms are not reasonable, it may not sell.  Or, it may take a lot longer to sell the business and result in you getting a lower price.  Keep in mind that no matter how good your business is, a buyer doesn’t have to buy it.  A buyer is comparing your business to others on the market, and if any of these terms are not realistic, it may kill a buyer’s interest.

The most common term we think of when we think of being realistic is the price.  If the price is too high, it generally means that the cost of financing the purchase will take too much of the cash flow and the buyer won’t get enough income, or return on investment, for the deal to make sense.  Keep in mind also that you are competing with other businesses on the market, in your industry, and all businesses.  If your price is not in-line with what others are asking for comparable businesses, buyers will buy another business.

Another reason that a high price will kill a deal is that, in most sales, the buyer gets an independent appraisal.  They may need one for the lender, or just get one to confirm the price.  If it is much lower than the deal price, the buyer may pull out of the deal or demand a lower price.

The best way to find out what your business is likely to sell for is by getting an independent sell a businessappraisal from an accredited appraiser.  Most business brokers can give you an estimate of the selling price using your financials and information on what businesses like yours have sold for.  These valuations are based on the financial results of your business -- generally weighting heavily on the most recent results.  That’s because a buyer is paying based on how your business is doing now and the most recent year’s results are the closest to it.  Don’t expect to get paid on the tremendous growth opportunity in your business or the “goodwill” you have from being in business for many years.

Another expectation that can be unrealistic is the proposed financing.  In order to get an SBA loan, the business tax returns, with typical add-backs, needs to show enough cash flow to provide an income to the buyer, payoff the loan and have a margin of safety.  If the tax returns don’t show this, then you will probably have to provide a seller loan.

It is unrealistic to expect an all-cash buyer.  Most buyers are leveraging the money they have for a down payment with a loan to buy a business.  The buyer that has enough cash to buy your business is usually looking at a larger business to buy using his cash as a down payment.   That’s not to say it never happens, because it does, but the all-cash buyer is a small percentage of the potential buyers.

Keep in mind also that the lower the amount of the down payment a buyer needs to buy your business, the more potential buyers there are for it.  An SBA loan typically requires 20% down and a seller loan 40% to 50% down.  If the buyer can get an SBA loan, there will be more potential buyers.

If your location is important to the results of the business, then a buyer will need to get a lease for the space.  Lenders will not give a loan that is longer than the term of the lease, with buyer options to extend.

A buyer will expect you to sign a non-compete.  This will prevent you from operating a competing business that does business with the same customers, or operates in the same market area, for several years – typically 3 to 5 years.  The non-compete is also likely to prevent you from hiring away employees.

You need to be realistic about the training and transition you will be willing to give a buyer.  How much they need depends on the skills of the buyer, how complicated your business is, and what other people or resources there are for training.  If you will be staying on for an extended period, it is reasonable to be paid for the time you put in.  But, the rate of pay will usually be lower than what you’ve earned in the past.

When you are putting your business on the market, think about the price, financing, and other terms as if you were the buyer.  Would they be acceptable to you?   Talk to us about the terms you expect.  We will give you our expert opinion on whether your expectations are reasonable.

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Should You Buy an Existing Franchise or Open a New One?


If you are thinking of buying a business, franchises have a lot of appeal.  They have a track record.  Many are household names.  Most have an operating manual that gives you the information on how to operate the business.  If you need assistance, they have people available to help you.  But, should you buy an existing franchise for sale or open a new franchise location?

The first thing you should recognize is that buying a franchise, no matter how many there are or how well known they are, is not a guarantee that you will be successful.  Just like a non-franchise business, there are successful franchises and unsuccessful franchises.  The same is true of individual locations.

As part of the process of buying a franchise, you will receive a Franchise Disclosure Document.  Franchises are required by law to give you a copy before you buy a franchise. 
This document has important information!  Read it.  It will give you information about conflicts between the franchisor and the franchisees.  It will tell you how many new franchises were sold and how many closed.  It may give you information on how much an average franchisee does in sales or earnings.  It will give you a list of the franchisees.  Contact several and ask them questions about the franchise.  Do your due diligence.

The primary reasons to buy an existing franchise are the same reasons you buy an existing business – to reduce the risk of going into business and to start out with employees, customers, and an immediate cashsell my franchise flow.  As I pointed out, buying a known franchise is no guarantee of success.  Buying one that is up and running reduces this risk since you can see how the business has been doing.  There is no waiting to ramp up and start making money.  Both of these benefits are worth something.  In many instances, you can buy an existing franchise at little more than the cost of opening a franchise.

If the franchise is doing well, it is likely that existing franchisees have bought up many of the best territories.  In the case of some franchises, when a good franchisee wants to sell, they steer the sale to a good current franchisee so they have a good operator running the business.  In this case, their interests are not to get the best deal for the franchisee.  Many franchisees recognize this and sell their business through a business broker.  Exposing it to the market will usually result in more buyer interest and a higher selling price.

I have to give you a warning.  When you talk to the franchisor, they are likely to try to convince you to open a new franchise rather than buy an existing one.  We have had this happen to buyers, who were buying an existing franchise, several times.  This is self-serving to the franchisor.  If you buy an existing franchisee, they don’t gain anything.  But, if you open a new franchise, you may be successful and increase the overall revenues of the franchisor.  If you are dealing with a local franchise representative, it is likely that they will get a commission on your purchase of a new franchise – but not on a sale of an existing franchise. 

There are many good franchises.  But, like any business that is started, there is no guarantee of success and how well a new location will do can vary significantly.  Give consideration to buying an existing franchise to reduce your risk and start out with employees, customers, and a cash flow.

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How to Buy or Sell a Business with Real Estate


One of the more difficult problems for business brokers is how to advertise a business with real estate.  Should we advertise the income and price of the business with, or without, including the real estate?  What adjustments need to be made in presenting the business with real estate?  What should we do if the owner of the business is not paying herself a fair market rent?  Here are some things that you, as a potential buyer or seller of a business with real estate should keep in mind.

First, you should recognize that there is no standard way that business brokers advertise asell a business and real estate business with real estate.  That means that you have to look into each one and look at how the business is being marketed.  We usually advertise the income and price of the business only -- after deducting the likely cost to a buyer of a new mortgage on the real estate.  This is because, if we advertise the price of both, the price will appear high to many buyers and we get a much lower response to our advertising.  Let me explain with an example.

Let’s say the business generates an owner’s cash flow (seller’s discretionary earnings) of $200,000.  An average multiple for a selling price of a business is 2.5X SDE, or $500,000 for this business.  Let’s say that net operating income of the real estate is $100,000.  A normal cap rate for commercial real estate is 10X which would put a price of $1,000,000 on the real estate.  If we advertise both together, we have an SDE of $300,000 and an asking price of $1,500,000, a 5X multiple.  Since we are marketing to business buyers, they think that the price, 5X cash flow, is too high since they are used to seeing multiples of 2.5X cash flow.

If you are evaluating a business for sale with real estate, you need to evaluate each separately.  First, look at the income and cost of the real estate and plug the numbers into your pro-forma for the business.  Then, see what the business generates in owner’s income and evaluate the price accordingly.

Here are some other things to look out for. 

  • If the business does not own the real estate, a separate tax return is being filed for the real estate.  You need to see that tax return and what is, or is not, on the tax return.
  • The rent that the business is paying may not be a market rent.  It may be higher or lower than a market rent.  You need to evaluate the business with the rent you will need to pay yourself to buy the real estate.
  • Watch out for the real estate taxes.  If there hasn’t been a recent sale of the property, it may be under-assessed.  When you buy the real estate, the property may be assessed higher and the real estate taxes on it will go up.
  • An SBA 504 loan is frequently used by buyers to finance the purchase of the real estate.  They typically have to put down 10% or 15% of the purchase price as a down payment.
  • Keep in mind that the real estate may be an important component for some businesses.  I sell a number of auto body shops.  Many are located in communities where it would be very difficult to get approval for a new body shop.  Many industry buyers would not buy the business unless they could buy the real estate.
  • Consider what the value or use of the real estate would be if the business was not located there.

Don’t be scared off by the cost of buying a business with real estate.  There is a difference in evaluating a business and evaluating the associated real estate.  Be sure you do both.

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Be Sure to Get the Training You Need When You Buy a Business


When a person buys a business, they usually recognize that getting trained to run it is important.  But, it may not be given the attention and importance that it should.  If you are buying a business, here are some things to remember when you are working out the training with the seller.

Discuss what training you need and how it will be given during your discussions with the seller before you make an offer.  This issue is frequently given just a token discussion.  Many times, it just revolves around the amount of time the seller is willing to provide.  A meaningful discussion should include what the training should consist of.  By breaking down the training more, both parties will be able to come to a better estimate of how much time is needed and what the training should consist of.  The buyer of the business will also get a better understanding of what the seller does in the business and what the buyer needs to do to replace the seller.

Working out the training is not usually an adversarial discussion, but rather figuring out whatbusiness training works for both parties.  Both parties usually have a strong interest in the buyer succeeding in the business.  But, most sellers are selling for personal reasons and want to move on to the next phase in their life as soon as possible.  They want to give the needed training, but make it as short as possible.  For this reason, unless the training is only a week or two, the buyer should be sure the seller is compensated adequately so the seller is happy to stay on and provide the training.

The amount of time a seller should remain at the business to train the buyer, and the compensation, should be part of the offer the buyer makes.  If the parties have discussed the training before the buyer makes an offer, then agreeing to the offer should not be unduly delayed by working out the training.  And, the proposed training should be closer to what the seller will accept.  At a minimum, the Letter of Intent or Purchase Agreement should state how long the seller will remain to provide training, compensation, and during what hours.  The amount of off-site support – typically by phone or email – after the initial training should also be worked out.  It is common for sellers to provide the off-site support at no charge if the amount requested is minimal.  If the initial training is adequate, the off-site support needs should be minimal.

During the period of time between the signing of the offer and the closing, the parties should work out the details of the training.  Creating the training agenda will make it more likely that the training will cover the information that the buyer needs to learn the business.

There are some things that a seller can do which will not only make training much easier and better, but also make the business more saleable.  This is to systematize the business as much as possible, write the system procedures into a manual, and develop a formal training program for new employees.  This is typically done in franchise businesses and is a reason that buyers find these businesses attractive.

Systemized processes make finding employees easier, their training better, and provide consistency to the products and services the business provides.  McDonalds doesn’t look for people who know how to cook hamburgers, they look for people who can learn the McDonalds’ way of cooking them.  The same practice can be applied to many of the processes in any business.  Once the system is developed, it should be easy to write the steps in the process down and train people how to do them.   Even though the buyer is managing the business and may not be “cooking the hamburgers”, the buyer should know what each of the important jobs in the business entails.

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When You are Looking for a Business Broker, Don’t Choose a Cowboy


When I think of a cowboy, I think of a tough individual who doesn’t need anything or anybody to do his job.  That may work on the range, but it doesn’t work well when you are buying or selling a business. 

If you have ever bought or sold a house, you probably used a real estate agent to do so.  Why?  Because if you were selling a house, you knew that they could reach many more buyers.  If you were buying a house, they had an inventory of houses to look at.  Why was that the case?  Because they were part of a group of real estate agents that co-broke the houses they sold.  Co-brokering makes for a much more efficient market and allows an agent to give better service to buyers and sellers.

If you are selling a business, you should use a business broker that co-brokes because itbusiness broker exposes your business to many more potential buyers.  Your business will be listed on all of the group members’ websites.  In addition, you have many more business brokers who may find a buyer for your business.  Your business should sell faster for more money by using a business broker who co-brokes.  If you are buying, there are a few benefits also.  The first is convenience.  By working with one business broker, you can be introduced to many more businesses.  Also, if the business broker represents you, you have someone helping you to evaluate the business.

Although co-brokering is prevalent in the sale of homes, it is not in the sale of businesses.  In fact, the opposite is probably true.  Nationally, there are probably many more business brokers who are not in a co-broke group than the number that are.  Why?  In my view, the primary reason is greed.  They do not want to share their commission with another broker.  But, if you asked, of course, they wouldn’t give you this reason because it is not a reason based on providing a better service to their customer.  They are likely to say that they can reach most of the potential business buyers or that many of the other business brokers are not competent.  Another reason they may give is the potential for vicarious liability.  These reasons don’t hold up to scrutiny.

We are members of BBANE, the only group of business brokers in New England that are co-brokering business sales.  There are 14 agencies with about 60 brokers in the group.  We recently had a $2,500,000 business sale between two brokers in different states.  The listing broker would not have known about the buyer without the participation of the selling broker in the other state.  The business-for-sale websites have certainly expanded the number of buyers that see an advertisement for a specific business.  But, it isn’t perfect; they don’t reach everyone.  Many business sales are started when a buyer talks to a business broker about what type of business they are looking for and the business broker finds a business that fits. (Isn’t the same true in the sale of homes?)

Another rationale for not co-brokering is that the other business brokers are not competent.  That’s simply not true.  Just like lawyers, doctors, or any profession, there are better and worse business brokers, but I’m comfortable working with the other brokers in BBANE.  Many of them have years of experience in the industry in which they have sold many businesses and have taken many classes to become better business brokers. 

Vicarious liability is a concern that can be dealt with.  If I’m selling your business and there is a co-broker involved who is working with the buyer, there is a potential for vicarious liability if that other broker represents the seller and me.  Vicarious liability means that the seller or I could be liable for a misrepresentation that the other broker makes to the buyer.  We avoid this by having the other broker represent the buyer, not the seller or me, and our Non-Disclosure Agreement clearly states this relationship.

When you need a business broker, you need one that works with other brokers.  Not a cowboy who thinks he can do it all by himself.

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Don’t Kill A Deal To Buy A Business At The 1st Meeting With The Owner


Buying a business is different than buying a used car.  If you act as though it’s the same thing and treat the owner of the business like a used car salesman, you will suffer.  That can result in the owner deciding not to sell to you, giving you a worse deal, or not being as helpful to you as he could be after you do buy the business.  Here are some important things to keep in mind when you meet with the owner.

You want the owner’s cooperation in your purchase.  Almost all owners are proud of their business and want it to continue. They want you to succeed and they can be very helpful to you, the buyer after you buy the business.   The owner has important relationships with customers, employees, and vendors that you want to have transferred to you. The owner probably knows the business better than any employee.  You may need some seller financing.  The owner can be more, or less, helpful in the transition.  I’ve seen situations where a buyer leaves such a poor impression with the owner that they refuse to sell the business to them.  Here are some tips on how to do your investigation of the business while not offending the owner.

business buyerTread carefully in your first meeting with the owner.  Start out by developing rapport.  Introduce yourself to the owner.  Ask about her background, how she got into the business, why she wants to sell the business now.  Ask to take a tour of the business.  Owners like to show off their business.  During the tour, the owner will be explaining the business and it gives you something to talk about.

Use the sandwich approach.  You want to make a good first impression and leave a good impression.  Ask your tougher questions in the middle of the meeting.  But, be careful how you phrase them.  Don’t make it sound like you think the owner is a liar.  Ask for “explanations” of things you question.  In many cases, the owner may not know the financials well.  The business broker may be better at getting you some answers on financial questions.

A buyer-seller meeting is not the place to do your due diligence.  While you may do some investigation of the business and its financials before making the offer, to be sure you want to buy the business, due diligence is a normal contingency.  This is a period of time during which you review the documentation that supports the financials and investigate other issues that could influence your decision to buy the business.  Due diligence is time-consuming to a business owner and they don’t want to take the time to prepare the information until they have a deal under agreement.

Don’t wear out your welcome.  You want the first meeting to move along so that everyone doesn’t leave worn out and thinking of it as a negative experience.  The first meeting typically takes about an hour to an hour and a half.  If you have a long list of questions and you can see that the owner gives long-winded answers which will make the meeting last much longer than two hours, you may want to hold off some questions until the next meeting or ask them of the business broker later.

Find out what the owner does in the business.  This is one of the most important pieces of information you need to know.  You are going to replace the owner.  You need to figure out how you can do so and do it in the way you want.  For example, if the owner is working 80 hours a week as the general manager and salesperson, you may need to find someone for one of these jobs if you don’t have the skills to do both or don’t want to work 80 hours a week.

Don’t discuss the price at this meeting.  The owner hired the business broker to handle the sale.  Talk to the business broker about your offer at another time.  Be careful about making a low-ball offer if the business is priced reasonably.  This can offend the owner or cause them to believe you are not likely to buy their business.  In either case, they may not want to deal with you further.

If you are looking at a good business, it’s likely that there are several other buyers looking at it also.  It is also likely the owner knows they have a good business to sell.  Keep these tips in mind when you have that first buyer-seller meeting and you will get off to a good start.

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How to Sell Your E-Commerce Website For More Money


Have you ever wondered what your website is worth? Have you ever thought about the changes you can make to your website to increase its value? If you own a website, chances are you have thought about selling your website or you are interested learning how much your website is worth. 

Website owners put countless hours into developing a website, creating quality SEO,sell a website increasing products and growing sales. However, when it comes time to sell the website, as the saying goes, “if you build it, they will come,” right? Wrong! Website owners may have a difficult time selling their website if it is not running as efficiently as it could be. 

Like many brick and mortar businesses, increasing traffic to your store or website can be challenging. For a website, having good SEO and an effective pay per click (PPC) strategy can increase traffic rather quickly. As traffic increases, so should sales and profits. Generally, many website owners respond to increasing sales and profits by adding more structure and staff rather than automating the system. 

Websites, like many other businesses, are sold on a multiple of Sellers Discretionary Earnings (SDE) or Cash Flow. Typically, these multiples range from 2x – 4x earnings or cash flow. A website owner can increase their multiplier by: 

  1. Having a clean automated system that operates on a small staff.
  2. Locate vendors that are willing to drop ship product for you, thereby limiting or eliminating inventory.
  3. Focus on automating the website so it can be run from a laptop computer and cell phone anywhere in the world.
  4. Having a clean set of financials that can be verified by a buyer. 

The first 3 key items add up to 1 main selling feature – being relocatable. Having a website that can be easily relocated will increase the number of potential buyers who can purchase your website. More buyers mean selling the internet business faster and for a higher amount. 

The last item directly relates to being financeable. Selling a website is unlike selling a brick and mortar business. There are very few tangible assets that will provide collateral for a bank loan. To find bank financing, a buyer will need to look for a lender that evaluates loans based on cash flow rather than collateral. With little to no collateral, a bank will be looking for squeaky clean financials in order to finance the deal. 

To learn more about selling your website or for a free website valuation, contact me, Gino DiGiallonardo, at or 508-922-7036. 

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The 7 Steps You Must Take Now to Buy a Business This Year


The first thing that you need to know is that you have a lot of competition in your search for a business to buy.  If the extent of your search for a business to buy is looking at Internet ads, it’s likely that when you find the right business, you won’t be successful buying it.  That’s because other buyers will be more prepared to take the steps needed to buy that business.  The first piece of advice I would give you is to be prepared to take action when you find the right business to buy.  How can you be prepared?  Here are my suggestions: 

  1. Set a goal to buy a business this year.  Break down what you need to do and use the SMART goal approach to increase the chances ofsmart goals success.
  2. Decide what type of business you want to buy.  What industry is it in?  What size is the business?  Are you looking for a distressed business or one that is doing well?  How much income does the business need to generate?  How much can you afford to spend on a business?  What skills will you bring to the business and what skills do the people in it need to have?  Give these, and similar, questions your thought so you will know the right business for you when it becomes available.
  3. Get to know business brokers.  Many business brokers will send an
    email to their buyer database when a new business comes on the market.  Be sure you are getting those emails.  Meet with the business broker so they know you are serious and will remember you when a business that meets your criteria comes on the market.
  4. Look at businesses that are for sale.  This will give you experience in evaluating a business and owners.  When the right one comes along, you will have other businesses to compare it to.  You will also show the business broker that you are serious about finding a business.
  5. Learn how to value a business.  Most buyers of smaller businesses make offers based on the asking price.  Asking prices may be too high or too low.  Owners may be willing to take much less, particularly when you can show them that their business is over-priced.  Generally, profitable businesses are sold for much more than just the asset value.  Learn about the income and market approaches to business valuation.
  6. Talk to lenders so you know how to get a loan to buy a business.  Lenders will have types of businesses they like or don’t like.  Most of our business sales are financed with SBA 7A loans.  Generally, the lenders are what we call “cash flow” lenders.  The cash flow of the business, not the collateral, justifies the price, and will provide enough money to pay back the loan and provide an owner income.  Using a collateral based lender can be problematic because, as written above, most profitable businesses sell for more than their asset value.  Where is the rest of the collateral coming from?  Your assets.
  7. Find a good lawyer and accountant to advise you.  Be sure the lawyer is experienced at business law and business sale transactions.  An accountant can be more useful if they have experience in the industry you want to buy a business in.
If you only do these 7 things now, it will put you well ahead of most buyers looking for a business to buy.  It will also make you more prepared to move promptly when you do find the right business to buy.
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Are Non-Compete Agreements in Massachusetts Worth it?


Marijo McCarthy is a principal in the firm of Widett and McCarthy, located in Newton, Massachusetts.  Marijo specializes in providing business contract and other legal advice to smaller businesses.  Marijo publishes a newsletter and this blog is from her recent newsletter.

My last newsletter focused on the confidentiality protection of non-disclosure agreements. This, in turn, raised questions regarding "non-competes."

Does that kind of protection belong in the same agreement? Who should sign it? Are they just for my employees? If I am selling my business, I know I will be asked to sign one, but what about a request from a client … as a business owner, should I agree to that onerous restriction? And, really, what is their value anyway?

Three years ago, I shared with you the then, current thinking on Beacon Hill as to the Massachusetts Legislature's take on non-competes. Today, and while there is growing support in many areas for some form of restriction of non-competes, there is, as of yet, no uniform agreement on what those restrictions should look like (other than less restriction on fewer employees for a much shorter period of time).

Here are my thoughts, if you choose to use a non-compete agreement with a key employee:


Be sure you have protected your confidential information.

That means more than just stating that protection in an NDA. Rather, you need to have a clear, written policy in your company as to what constitutes confidential information, how it is protected and to whom access is given. Absent that, it is highly unlikely that a Court will grant you the protection you seek if there is a breach by an employee.


Be sure it is as specific and narrow as possible.

Be specific about your business and about the information that is protected. For instance, if you attempt to claim that the names of your clients are to be protected, but you publish those same names on your web site for marketing purposes, it is highly unlikely that a Court will protect those client names. The broader and more vague the non-compete agreement, the less likely that a Court will find in your favor, should you ever have to enforce it.


Be aware of the need for and the cost of enforcing it.

If a key employee leaves, goes to a competitor and shares your confidential information, you either must enforce the non-compete agreement [spending a lot of money to do so] or you need to ignore the violation [in which case, the value of that non-compete with futurenon-compete employees will have just plummeted].

I have often counseled clients to think long and hard before asking a new employee to sign a non-compete for this very reason. Failure to enforce due to the expense of doing so, renders those agreements practically valueless for that employee and for all those who follow.

What then, can you do to protect your business from a constantly moving workforce? Have you considered utilizing a non-solicit agreement? A well-drafted non-solicit agreement…


… restricts the departing key employee from making direct or indirect contact with your company's clients or fellow employees, to encourage a client or colleague from leaving your company and joining the company to which the departed employee has gone.


… is often easier for a Court to support and enforce. The former employee and his new employer may both become targets if one encouraged or allowed the violation of an enforceable non-solicit agreement. So, you have deep pockets to pursue and perhaps more incentive to spend the money to do so.


… is easier for an employee [and his potential new employer] to understand. It provides a time and geographic framework which is [or should be] clear and unambiguous, something which makes violations easier to spot and enforce.

Bottom line? There are practical and legally-enforceable ways to protect your company's confidential information, provided that you invest the time and resources to do so. And, given the consequences of ignoring this issue, it is worth consideration, discussion with counsel and keeping a sharp eye on Beacon Hill!


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