[IMGCAP(1)]Accounting firms come across noncompete agreements in several different contexts: in the valuation of a company when purchased by a client, in divorce litigation and as part of the employment agreement in the accounting firm itself.
“When a business is being sold, the buyer is expecting that he will get what he is paying for,” said Viresh Dayal, principal in the Management Advisory Services Department at Morrison, Brown, Argiz & Farra, where he leads the Litigation Support and Valuation Practice. “So we often see a noncompete agreement as playing a part in the valuation of a business when it is being sold.”
“In the distribution of assets between a husband and wife in divorce litigation, a noncompete agreement will often dictate how a business is to be appraised,” he said. “This is especially so when one of the spouses is a key person who has all the business relationships and the ability to take a competing business across the street. And finally, accounting firms typically will have noncompetes as part of their employment agreement. The reason, of course, is that if you are working with clients of the firm, you should not be allowed to steal them from the firm.”
The important point to consider is how to hold together an organization, noted Tom Jones, a shareholder and chair of the Atlanta Corporate Team at Chamberlain Hrdlicka. “How do you maintain the personnel that have come into the buyer organization, and how do you make sure that they don’t decide to take their files and go home and do something else?” he said.
Not all noncompete agreements are enforceable, and whether or not they are enforceable will vary by state.
“Some suggest that they interfere with the advancement of industry, because certain levels of growth and innovation are impossible to reach when employees are restricted from moving freely between jobs,” said James Pooley, former deputy director general at the World Intellectual Property Organization in Geneva. “Judges sometimes hesitate to enforce noncompetes because they impinge on the free movement of labor.”
“California makes it difficult to sue under a noncompete agreement,” agreed Dayal. “They feel they are a restraint on innovation and trade, so they should be made difficult to enforce. The exception is in business acquisitions, where there is a good reason to have such an agreement enforceable when you’re paying for a business.”
In Florida, accounting firms typically will have noncompete agreements, while law firms do not, according to Vayal. “That’s why, when you see notices of professionals moving to a different firm, the number of attorneys changing positions is 10 times the number of accountants,” he said.
“The terms of this kind of agreement can range from compensating workers for not seeking employment with any competitor to simply prohibiting competing for a certain period of time within a particular geographical area,” said Pooley. “This is in contrast to nondisclosure agreements, which allow ex-employees to continue working in the field so long as the confidentiality of their former employer’s trade secrets is respected.”
There is a misconception that noncompete agreements are not enforceable, according to Jones. “The reality is that noncompete agreements are enforceable,” he said. “Many states have enacted statutes that make them more enforceable than they have been historically, so they are tools that can be used in buying an accounting practice or any other service business where there is a need to preserve the value of what is being purchased. Basically, the buyer is purchasing client relationships with the seller that they are trying to incorporate into the buyer’s practice. They’re really buying the people and hopefully the right and the opportunity to service their clients. One way to deal with that is through a noncompete agreement that ensures that workers that leave won’t be competing or taking away clients for some time after the transaction.”
Formerly, an overly broad noncompete agreement would be thrown out, he explained. “Now, in many states, the court will ‘blue pencil’ an agreement to make it reasonable in scope and will enforce it.”
“A tax firm acquires clients through expensive marketing efforts, and they are the property of the firm, not the preparer,” said Chuck McCabe, president of Peoples Income Tax and The Income Tax School. “If a preparer leaves, they should not be entitled to take those clients with them. To make sure that doesn’t happen, the employment agreement should contain restrictive provisions, including a noncompete agreement.”
“In order to be upheld, the agreement must be reasonable in terms of duration and also in terms of geography and in restrictions of one’s livelihood,” McCabe said. “If it’s not reasonable in one or more of those aspects, it could be dismissed by a court. Such agreements are typically not upheld beyond the term of employment in California.”
“We make our noncompete reasonable by limiting it to two years beyond the term of employment and limiting it to a 25-mile radius from any of our offices,” said McCabe. “To make it nonrestrictive in terms of their livelihood, it applies only to clients whose returns were prepared by that employee directly or indirectly. In other words, they can go out and get any new clients they want, even ones that are ours as long as their returns were not prepared by them when they were working for us.”
Register or login for access to this item and much more
All Accounting Today content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access