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Non-Solicitation AgreementNon-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.  

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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.

A non-solicitation agreement needs to meet certain criteria in order to be enforceable by law.

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.

 

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Holly Magister, CPA, CFP

Holly A. Magister, CPA, CFP®, is the founder of Enterprise Transitions, LP, an Emerging Business and Exit Planning firm. She helps entrepreneurs assess, re-align, and accelerate their business with the intent of ultimately executing its top-dollar sale.
Holly also founded ExitPromise.com and to date has answered more than 2,000 questions asked by business owners about starting, growing and selling a business.
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