Holly founded ExitPromise.com as well as StartupPromise.com and so far has answered more than 3,000 questions asked by business owners about starting, growing and selling a business.
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Non-Solicitation Agreements (NSAs) are made by two parties to protect one party from a potential loss of income or assets. This type of agreement is warranted and often made when one party is about to become aware of certain important relationships the other party has developed. The non-solicitation agreement may be set forth between two or more businesses and/or individuals. The NSA may be either a stand-alone agreement or included as a separate clause in other types of business agreements.
A non-solicitation agreement is a contract in which a business, individual, or employee agrees not to solicit clients or customers for their own benefit or the benefit of a competitor during their association or for a subsequent period of time. A non-solicitation agreement may also include other restrictions, such as an agreement not to solicit or encourage employees, coworkers, or even independent contractors to join or work for another business in the future.
In most cases, a non-solicitation agreement is presented to an employee as a separate clause in their employment agreement. In other cases, a non-solicitation clause may be part of a confidentiality or nondisclosure agreement, severance package, or non-compete agreement.
Why Use A Non-Solicitation Clause When Selling a Business?
When businesses are involved in a merger or acquisition, it is not unusual to see the use of a non-solicitation clause in the transaction’s confidentiality agreement. In this case, the seller desires to protect its employees, customers, and other important relationships from a potential buyer’s unethical attempt to steal away the business’s intellectual property and intangible assets.
When Is A Non-Solicitation Agreement Used With Employees?
Non-solicitation agreements can be presented to the employee at any time, whether that be prior to the first day of employment, or after the employee has already started working for the company. These agreements are most often used in service or sales industries, and are especially common when a business has a limited pool of customers or clients. Non-solicitation agreements are also common when a company sells a product that isn’t necessarily unique, and competes primarily on price.
What Makes A Non-Solicitation Agreement Enforceable?
A non-solicitation agreement needs to meet certain criteria in order to be enforceable by law. Below, we’ll outline the basics, however we recommend seeing an experienced lawyer for guidance on drafting a non-solicitation agreement for your business, as requirements can vary by state.
Valid business reason. In order to enforce non-solicitation agreements, a company or owner must have a valid business reason to do so, such as protecting a valuable customer list, trade secrets, or protecting valuable employees with specialized skill sets.
Employees and customers are free to leave at will. Non-solicitation agreements can not be used to force employees or customers to stay with the company, or keep them from signing on with a competitor. It only demands that former employees not improperly solicit a prior company’s customers, clients, or employees.
A customer or client list must be worth protecting. The company’s customer list must be confidential, and must not be accessible by the public. The company must provide proof that it spent valuable resources (time and money) on creating its unique customer base.
Common Mistakes Made When Drafting a Non-Solicitation Agreement
Not defining the term “solicit.” The term solicit is vague, and when drafting your non-solicitation agreement, we recommend defining what it means to your business. For example, your agreement may explain that a former employee cannot interview or hire another former co-worker, or speak with to customer with the intent of obtaining business.
Maintaining old agreements. Be sure to reevaluate the employment agreement each time an employee is promoted or changes positions. Since different positions may have different levels of access to sensitive information, a new agreement should be signed with each job title change. Alternatively, language should be included in the agreement that states the agreement is valid for the employee’s term with the company, regardless of position changes.
An agreement that is too vague or broad. Non-solicitation agreements should be tailored for each position, depending on the amount of sensitive information or customer information each position can access. Additionally, the agreement needs to be reasonable and specific about exactly what “solicitation” means.
The Difference Between A Non-Solicitation Agreement and A Non-Compete Agreement
Often confused, a non-solicitation and a non-compete agreement have two separate purposes. While a non-solicitation agreement ensures that former employees do not solicit former co-workers, clients, or customers, a non-compete agreement is more broad, and ensures that a former employee doesn’t compete directly with its former employer. This could mean placing restrictions on where the employee can work for a specified amount of time following employment.
Hello,
I am selling part of my nationwide business(8 out of 9 facilities) while keeping one location, they are not interested in the 9th location. The buyers want me to sign a non-solicit agreement, which I have no problem with.
My question is if a customer calls me for service because they don’t want to deal with buyers company for whatever reason, can I accept that customer(s) back? These customers would be located in a state where I sold my other shops and I have a non-compete.
Hi Albert,
First, congrats on your successful business and pending business sale!
You’ve mentioned two types of agreements or clauses in your question — the first is a Non-Solicit and the second is a Non-Compete. These two agreements/clauses are meant to accomplish different things.
If your purchase agreements include a non-solicit clause, it typically is meant to restrict you from actively selling to a specific customer base, approaching employees for employment and or working with specific vendors you’ve got relationships with in your existing business. A non-solicit clause should be specific so you don’t inadvertently get yourself into trouble after the closing.
A non-compete agreement or clause should also be very specific for the same reason. This type of agreement usually addresses customers (soliciting), however it may restrict you from engaging in any form of business that’s similar to the one you sell to your buyer. So, be very careful. Non-competes can be drafted in a way that nearly anything you do in a similar business (industry) is a violation of the agreement. You don’t want that.
Please discuss these two restrictive clauses with your legal counsel!
My recommendation is to discuss the scenario you’ve asked about here with your buyers now and incorporate an arrangement that will work for both you and the buyer into your purchase agreements before the closing occurs. They want to buy your business and that’s great. You want them to succeed after the sale. So, now is the time to find common ground.
Hope this helps Albert!
Hi Holly
I’m wondering if you can answer my question?
I run my own graphic design business, I’ve been approached by a few design agencies to assist with design. Since i’ll be assisting their clients with design they don’t want me to contact or take their business away from them (Which i fully understand) I assume the non-solicitation agreement is the way to go? I’ve only found employer employee contracts, no business to business.
Do you perhaps have one, or know where I can download one?
Hi Sandy,
It sounds to me that you may need to create an Independent Contractor Agreement between your firm and the agencies.
Typically those types of agreements spell out non-solicitation requirements.
Here’s a great online source we’ve used for creating this type of agreement (and others too).
All the best…
I am in the process of negotiating/ selling my business to a competitor, I would like to insert a non-poaching/solicitation agreement into the NDA
Hi Walter,
When selling a business to a competitor, you should be concerned about this risk.
Including a non-solicitation clause that covers employees, customers and even certain specialized service providers which may be critical to your business’ success is reasonable.
We have another post that addresses this topic in greater detail here.
All the best…
I own a business and am subcontracting a portion of a custom job out. What document can prevent the subcontracting business from going direct to my customer?
Hi Gene,
You may want to develop a Supplier Agreement or contract with the company that is performing these services or producing a product for your customer which includes confidentiality clauses and non-solicitation language.
This would help to protect your business from the scenario you’ve described.
All the best…
Henry,
As a business broker, I have reviewed hundreds of confidentiality agreements. Every agreement I have seen has non-solicitation language where the buyer agrees not to solicit the customers and/or employees of the seller. This is typical.
Hi,
Thanks for this article! I’ve been trying to buy my brother-in-law’s business and his Attorney sent me an agreement with a non-solicitation section in it.
I don’t understand why he would do this. It makes me feel as if I am not trustworthy.
How do you suggest I handle this?
Thx!