Ohio Practical Business Law : Columbus Ohio Business Lawyer & Attorney : Teri Rasmussen : Plunkett Cooney Law Firm : Commercial Law, Creditors, Business Formation : Columbus, Central Ohio

Are we there yet?  Anyone who has ever been involved in a transactional deal of any complexity has udoubtedly at least thought, if not uttered, this well worn phrase in frustration as yet another obstacle arises to the successful completion of the contemplated transaction.   

Even sophisticated clients are sometimes frustrated by how long it seems to take lawyers to "close" and complete a transaction.  Clients with less experience can become positively apoletic about the fact that it takes more than a week or so for the lawyers to declare the deal done and finished.  Frankly, as one of the lawyers at the center of these trabsactions, I too am occasionally surprised how long it can take in certain situations to successfully complete the transactions.

So why does it take so long, and perhaps more importantly, how can everyone in the deal know how close we are to being able to answer yes to the perennial question "are we there yet?  One of the best tools to understand both what's involved in getting a particular transaction completed AND, on a real time basis what's left to do is a CLOSING LIST.  Every transactional attorney uses some variation of a Closing List to keep track of which tasks and items have been completed, which are still in process, and which issues and tasks still need to be addressed. 

A Closing List for a loan transaction  (Click here and  here  and here for examples) necessarily differs somewhat from a Closing list for a purchase/sale of a business or other transaction (click here and here for examples), both share the same basic elements and utility.  When I do my Closing List, I always start by putting the contact information for all the parties and their attorneys and other important agents and representatives at the top of the first page.  This way I'm never searching for a phone number or e-mail at a crucial point in negotiations.  

The rest of the Closing List is generally in the format of a table.  My tables have visible grid  lines so I can easily see each discrete item or task.  I usually have five columns: 

• Item Number (for quick reference and efficient organization of various folders pertaining to the deal)
• Name of Item or Task (for obvious reasons)
• Responsibility (i.e. which party is primarily responsible for preparing the documentation or completing the task) 
• Status (entries in this column are constantly changing as progress occurs)
• Comment (for additional useful information such as actual or potential obstacles to be resolved, other contact people, etc,)  

Because every deal is different, most closing lists are organic instruments which begin with certain basic items and tasks common to that sort of particular transaction and then initally grow longer as the unique aspects of the deal at hand become fleshed out.  Like other transactional attorneys, building out the Closing List helps me organize what needs to be done and the order in which tasks and items should be attacked.

I usually wait to give clients a copy of the Closing List until I am fairly certain it is a reasonably complete reflection of what will be entailed to make the contemplated transaction a reality in a manner that properly protects my client.  After circulating the intial Closing List, I try to provide updated revised Closing Lists on a regular basis which show where progress has been made and where we may have run into a roadblock or detour that may delay completion of the transaction. 

My hope and intention is that sharing these updated Closing Lists will allow clients to have as close to the same understanding as I do about "where we are" as far as getting the deal done and why we're not there yet.   Thus, if your attorney gives you something of this nature, don't just put it aside and assume it has no purpose relevant to you.  It's your best guide to what's been done so far to bring the deal to fruition and what still remians to make it a reality.   

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Whether it's multi million or billion dollar merger of public companies like the recent Arby's - Wendy's merger here in Columbus or the stock/asset sale of a large or small privately held company, a crucial part of the transaction is completion of "due diligence."  So what is "due diligence" and why does it matter? 

Due diligence is about making sure that you really are buying what you think you are.  It can be invaluable in uncovering defects which may be deal killers or at least require remediation before closing or a restructuring of the economics of the transaction,  It can also be useful in gaining useful information about the overall strengths and weaknesses of the company that you will need once you are in charge of operating the business. 

Without "due diligence", a buyer may discover too late that the facilities require enormous capital expenditures to compensate for deferred maintenance.  Perhaps the largest customer is very unhappy and in the process of moving its business to another company.  The accounts receivable may be well past due and even uncollectible. 

In larger transactions, "due diligence" can take months, be extremely costly and involve professionals of many kinds (including attorneys and CPAs).  When smaller privately held companies are involved, the process is less complicated, but should not be ignored entirely.  For a helpful rundown of what "due diligence" is all about and the process, visit this FAQ.   

Every company being acquired and every industry is different so different things will be important in any particular "due diligence" process.  However, for a nice overview of the sorts of tgenerally applicable things you should ask about when doing "due diligence", visit "What Does 'Due Diligence' Mean When Buying a Business?"  There are also many many good due diligence checklists available on the web.  Some of the most important things you should be interested in finding out should include:

• Security Interests and liens on the assets being purchased
• Unresolved pending or threatened litigation
• Financial health of the company, including collectibility of accounts receivable
• Identification of the key assets essential to the continued operation of ongoing business being purchased
• Current employee benefits and policies
• Quality of relationships with customers, vendors, and suppliers
• Condition of equipment and facilities
• Agreements among owners relevant to the purchase
• Saleability of inventory

..... And now I get to go home and see if the electricity knocked out yesterday afternoon by the ferocious wind storm remains of Ike has come on yet.  According to the news reports, 2 million people in Ohio are without power and almost 60% of those of us living here in Central Ohio lack electricity.  Some estimates are that it may take up to a week to get it all back on.  Thankfully, my hot water heater runs on gas so at least there'll be no cold showers.

UPDATE: Click here for a very basic checklist for doing "due dilgience".

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Many a franchise, including Wendy's, White Castle, and Max & Erma's, got their start here in Columbus, Ohio where I practice business and commercial law.  So it is really not very surprising that budding entreprenuers in Central Ohio, as elsewhere, often consider a franchise opportunity when looking to start a business.

Concept and Information Availability.  Basically, the concept behind a franchise relationship is that in exchange for fees which can run into the several thousands of dollars, the franchisee new business owner receives the benefit of a proven business system and the associated experience.  And franchising may well be the way to go.  Franchisors often will provide resources and experience not otherwise available to a new business owner.  However, there will also be some loss of autonomy when it comes to how you run the business from day to day.

For better or worse, there is no shortage of information available regarding franchising.  (Interestingly, franchising is also apparently extremely popular in the Phillippines based on the results I got from the Google search I just did.)  But how do you know which information is reliable and correct?  How can you determine which franchise opportunity, if any, is right for you?

Begin by Assessing Personal Strengths and Weaknesses.  You should begin by taking a close look at yourself and weigh your strengths and weaknesses.  For example, are you a "team player"?  Because a franchise relationship is all about following someone else's system, you need to be able to picture yourself in that role.  Do you have particular knowledge about certain industries?  The Small Business Administration offers a helpful  "Is Franchising Right for Me?" workbook to help make this assessment.

Understand General Franchising Fundamentals.  Next you should make sure you understand at least the fundamentals of how franchising works.  Here again the SBA website excels in providing useful information on franchising and how to proceed if you are interested in this means of starting a business.  Entrepenuer.com's "Franchise Basics"  and "Franchise Terminology" posts also provide useful information about franchising, its terminology, and some of the details to which you should pay attention; other posts cover other questions on franchising. 

In addition, Mike Hamblin of the Michigan Business Lawyer Blog has written a four-part series on "Could a Franchise Be a Viable Opportunity for a Michigan Entreprenuer?" which provides a good overview of franchising, whatever state you live in:

• Part 1 - General Overview of Franchises (explaining the types of franchises available
• Part 2 - What Constitutes a Franchise? 
• Part 3 - Franchisors' Federal Disclosure Obligations [under the Uniform Franchise Operating Circular - more on that later]
• Part 4 - Franchisors' State Law Disclosure Obligations (Note that although Ohio Rev. Code 1334.02 does require certain disclosures with respect to "Business Opportunity Plans", these are not applicable to franchise opportunities offered in Ohio so long as they comply with federal disclosure requirements.)

Evaluate Specific Franchise Opportunities.  Once you understand the basic idea behind franchising and how it works in general, you are ready to start focusing more specifically on particular franchise opportunities.  How should you go about evaluating what's available?  What's important to look at? 

• The Small Business Administration provides an excellent Consumer Guide to Buying a Franchise on its website which does a great job of highlighting important issues to consider.  

• Rush Nigut of the Rush on Business blog (Congratulations Rush on your new position at Central Iowa-based Brick Gentry, P.C.) frequently posts on franchising.  He offers posts on "Fundamentals of Franchising - Franchisee's Perspective" and "Franchises: Four Things to Make You Go 'Hmm" which address certain "red flags" you should watch for and be wary of, as well as many other fine posts on the subject.

• The American Franchisee Association warns about "The Twelve Worst Franchise Agreement Provisions" you should avoid at all costs and also discusses "The Problems Franchisees Face" of which you should be aware.

There are also several good sources of information about particular franchise opportunities:

• Rush Nigut offers some suggestions in his "Looking for a Franchise?  Be Sure to Pick the Right Resources" post on the Rush on Business blog.

• The Franchise Law Blog published by the attorneys at Connecticut-based Wiggin & Dana LLP provides frequent news items about particular franchises that could be helpful in evaluating the viability of specific franchises.

• The Franchise King blog, published by self-described "Northeast Ohio's franchise guru" Joel Libava, is a bit more glitzy, but also offers information about specific franchises and going about evaluating them, as well as numerous links to other sources of information.  (This one took a little while to load on my home computer the first time I visited so you may need to be patient.)  

Read - Carefully - the Disclosure Documentation the Franchisor is Required by Law to Give You.  When you have narrowed the choice down to a couple of franchise opportunity possibilities, it's time to review (if you have not already done so) the disclosure documents provided by the franchisor as required by federal law.  Until recently, these disclosures were contained in a document called a Uniform Franchise Offering Circular.  Now being phased in and becoming mandatory after July 1, 2008, these disclosures will instead appear in a Franchise Disclosure Document.  The disclosures required will remain largely the same, but some additional information will be provided in a franchisor's Franchise Disclosure Document.

• Rush Nigut of the Rush on Business blog provides a relatively concise overview highlighting "Key Differences Between UFOC and New Franchise Disclosure Document".

• Take the time to listen to  "A Close Look at Pitfalls in the Franchise Disclosure Document" podcast.  This podcast features about a half hour interview of franchisor attorney Warren Lewis and franchisee attorney Julie Lusthaus and does a great job of presenting both perspectives.  It also does a tremendous job of explaining how the new Franchise Disclosure Document will differ from the UFOC, as well as the importance and usefulness of the various disclosures required - all in easily understandable language.  This is an excellent resource for anyone considering entering into a franchise relationship and is well worth the time to hear.   

• For those wanting a more technical discussion of disclosure requirements, visit the Federal Trade Commission's website.   

In many cases, entering a franchise relationship is a good option for someone wanting to start a new business, but apprehensive of possible consequences stemming from inexperience.  It can also be a way to jump start the path to profitability if you choose the right franchise.  However, it is extremely important to do extensive "due diligence" research to be sure you are making a good choice. 

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When buying a business, one of the principal considerations is ensuring that one obtains a "clean" title unencumbered by liens and obligations to others.  I've previously posted about why sophisticated buyers often prefer structuring the acquisition of a business as an asset sale rather than a stock deal to address this concern.  However, even if the transaction is done as an asset sale to minimize the likelihood of unwanted liabilities following the new owner, purchasers must still be concerned about the prospect of "successor liability" if proper precautions are not taken.  If "successor liability" is found to be applicable, the new owner will discover that the overall cost of the transaction is substantially greater than expected.

General "Successor Liability" Conditions.  The seminal case in Ohio regarding "successor liability" is Flaugher v. Cone Automatic Machine Co., 30 Ohio St.3d 60, 507 N.E.2d 331 (1987).  Although the purchaser of a business generally cannot be held liable for the obligations of the seller, Ohio law as interpreted by the Ohio Supreme Court in Flaugher recognizes four specific exceptions to this rule, namely:

• If the new entity has expressly or impliedly agreed to assume the liability
• The transaction amounts to a de facto consolidation or merger
• The new entity is "merely a continuation" of the already existing entity
• The transaction is entered into fraudulently for the purpose of escaping liability

Mere Continuation.  A company will be held to be a "continuation" of an existing entity, and therefore subject to successor liability when the two entities have "significant shared features" such as the same equity ownership, same employees, the same service or product being produced, same supervision, etc.; in addition the dissolution or liquidation of the existing company soon thereafter is seen as a marker that successor liability should be applied.  Inadequacy of consideration for any assets conveyed from the existing entity to the new entity is also a red flag.  Thus, the more the new company looks like the old one, the more likely it is to be vulnerable to successor liability.

De Facto Merger.  The "hallmarks of a de facto merger" were explained by the Ohio Supreme Court in Welco Industries, Inc. v. Applied Companies, 67 Ohio St.3d 344, 617 N.E.2d 1129 (1993) to include:

(1) the continuation of the previous business activity and corporate personnel, (2) a continuity of shareholders resulting from a sale of assets in exchange for stock, (3) the immediate or rapid dissolution of the predecessor corporation, and (4) the assumption by the purchasing corporation of all liabilities and obligations ordinarily necessary to continue the predecessor's business operations.  

Applicable to Contract as Well as Tort Liability.  Initially the "successor liability" doctrine applied primarily to tort liability for claims of negligence and similar actions.  In Welco, however, while the Ohio Supreme Court deslined to find successor liability under the facts of that case, it did indicate that under appropriate facts, a successor corporation might also be held liable for contractual obligations of its preedecessor.  For those wanting an in-depth discussion of Flaughler and Welco and the evolution of the successor liability doctrine in Ohio, the Franklin Couty Court of Appeals' decision in Mandalywala v. Omnitech Electronics, Inc., 2006 Ohio 2872, 2006 Ohio App. LEXIS 2717 contains an excellent discussion.   

Example.  The recent case of Pottschmidt v. Klosterman, 169 Ohio App.3d 824, 865 N.E.2d 111 (2006) provides useful perspective in the practical application of this test for "successor liability" in the extreme case.  In that case, a doctor joined the existing practice of another doctor which was organized as a corporation and became a shareholder in that organization.  Eventually, one of the doctors chose to resign as a shareholder and instituted suit against the corporation for various employment related claims. 

Thereafter, the remaining doctor formed a new corporation with a new bank account, but continued in the same office location with the same furnishings, employees, phone number, and patients.  The departing doctor sought to impose liability upon the new corporation for his employment related claims.  In finding that a de facto merger had occurred and that the new corporation was a "continuation" of the original company (and therefore liable to the departing doctor), the Court of Appeals found:

At trial, however, evidence was presented that the new corporation took possession of the original corporation's office equipment, medical supplies and accounts receivable.  The new corporation served substantially the same patients and was operated in the same building as the original corporation.  There is a single 100% shareholder of both corporations, Dr. Klosterman.  The new corporation pays the monthly office lease and equipment payments that the original corporation previously paid.  The original corporation's employees were employed by the new corporation and were compensated by the new corporation for services rendered to the original corporation....  the original corporation retained no assets.  Moreover, the original corporation closed its corporate bank account, changed the name on the profit sharing accounts and filed a final tax return with the IRS, which effectively constituted an end of the original corporation.   

Although not directly applicable to the sale of a business, it does show the types of things purchasers should try to avoid.  Thus, even in structuring asset transactions, care should be taken in specifically disclaiming unwanted liabilities and in how the post-transaction company should operate.  

Sales Tax Liability.  By statute, if provision is not made for payment of outstanding sales tax, the new owner can remain liable for its predecessor's obligation to the State of Ohio.  And that liability can also extend personally to the equity holders of the new owner.  This is one I did not fully appreciate until recently when I started acting as Outside Counsel for the State of Ohio with respect to the collection of state tax obligations.

Pursuant to Ohio Rev. Code 5739.14, an escrow account containing a sufficient amount to cover any outstanding sales tax obligation must be established:

His successor shall withhold a sufficient amount of the purchase money to cover the amount of such taxes, interest, and penalties due and unpaid until the former owner produces a receipt from the tax commissioner showing that the taxes, interest, and penalties have been paid, or a certificate indicating that no taxes are due.

Thus the prudent business buyer will insist on receiving a Sales Tax Release Certificate which can be obtained by completing a Request for Sales Tax Release and submitting it to the Ohio Department of Taxation.  For further information, click here for instructions provided by the Ohio Department of Taxation.  According to the Department of Taxation, it will take approximately 30-90 days to process the request.  A tax release will be issued by the Department of Taxation after:

• The business has been sold and the seller has filed the final sales tax return (final return should be sent directly to the Central Office, Tax Release Group, with guaranteed funds); AND

• The Department has reviewed the seller's account and found that:  a) All sales tax returns have been filed,  b) all reported tax, interest and penalties have been paid,  c) all filing and reporting requirements have been met.

Penalties for failing to pay state sales tax can be substantial.  In addition, other consequences such as suspension or revocation of any liquor license held by the new owner can occur if payment of sales tax is not made in a timely manner.  Thus, it is important not to overlook this aspect in the midst of everything else involved in the acquisition of a business.

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The central legal document in the purchase and sale of any business is the Purchase and Sale Agreement. It fleshes out the details behind the key points mentioned in the "letter of intent" and contains the procedures needed to meet or carry out the respective requirements of buyer and seller. Although, customarily, the purchaser is responsible for providing the initial draft, sellers should not assume that the provisions of the Purchase and Sale Agreement (sometimes referred to as the "PSA") require little of their attention.

If an attorney has not yet been consulted for assistance with the transaction, NOW would be an excellent time to remedy that. PSAs vary considerably and, depending upon whether viewed from the perspective of buyer or seller, some language will be more beneficial than other. In addition, provisions appropriate in one deal may actually be harmful in another. For a more in-depth look at the overall process and documentation involved in the purchase and sale of a business, view my seminar PowerPoint presentation Buying and Selling a Business - Legal Insider's Practical Guide. To read my blog post about choosing whether to structure the transaction as an "asset" or "stock" deal, click here .

Regardless of how the transaction is structured, perhaps the most important, and often the most intensely negotiated, part of the PSA to both sellers and, especially, buyers are the "Representations and Warranties", sometimes simply referred to as "Reps and Warranties". A seller's representations and warranties are essentially assurances from the seller and/or seller's shareholders about the nature, scope. and condition of the business. As such, they operate in tandem with a prospective purchaser's due diligence activities, but should definitely not be viewed as a substitute for that. Because liabilities come automatically with the purchase in a stock/equity deal, reps and warranties are particularly important in those transactions. When the deal is largely or entirely seller-financed, a seller's representations and warranties may become somewhat less important because the buyer will have the ability to offset remaining payments due against any problems; however, even here the content of what is said still matters.

For prospective purchasers, there are three main reasons for focusing on a seller's Reps and Warranties:

• Due Diligence. Reps and warranties are often utilized as a device for obtaining disclosure of crucial information about a company and its business and financial affairs. In this way, they can help aid and organize other due diligence activities. In addition, reps and warranties can also help reduce any transitional "learning curve" after the purchase by providing the buyer with much useful information about how the business operates.
• Exit Hatch. Reps and warranties can also serve as a basis for terminating the transaction if due diligence activities of the prospective purchaser reveals false or inconsistent information prior to Closing
• Damages. Reps and warranties establish what is being bought by providing a detailed depiction of the comapny and its business/financial affairs as it will exist at Closing, thus giving the buyer some assurance that the buyer's expectations of what is being purchased will in fact be that. If the reps and warranties turn out not to be true, that can give the buyer the right to refuse to pay the balance of the purchase price or to demand indemnification from the seller.

From a seller's pont of view, the main reason to pay attention to the "reps and warranties" they are asked to make is that it may affect their abilty to receive the full purchase price bargained for if the reps and warranties prove to be incorrect in any way. Depending upon how the agreement is written, this can be true even if the seller didn't know a particular rep and warranty was incorrect.

So what seller reps and warranties should be included? It depends on the individual transaction, but generally all or most of the following will be included;

• Organization and Good Standing - Seller is properly formed from a legal standpoint
• Authorization; Enforceability - Corporate resolution or other appropriate company or shareholder/owner action authorizing the sale has been taken and nothing else must be done for the deal to be enforced against the seller
• No Violation - Seller is not prohibited from selling by any agreement with any other party or any court order
• Title to Assets; Permitted Encumrances - Key provision for both buyers and seller because it defines what is being sold and its value after taking into account debt to creditors.
• Condition of Assets and Facilities - Extent of specificity will reflect s buyer's areas of concern. materiality and knowledge qualifiers may be appropriate, but should be carefully evaluated.
• Financial Statements - Essentially intended as assurance that Buyer can rely upon the accuracy and completeness of financial statements provided by the seller during the due diligence period. Which financial statements and whether they must be "audited" or merely "reviewed" financial statements depends upon factors such as availibility, relevance to the buyer's commercial valuation of the acquisition and the burden and expense to the seller which the buyer wishes to impose and the seller is able and willing to bear
• Environmental Matters - pertinent when real estate is involved
• Customers and Suppliers - References key contracts and provides assurances that they are valid and enforceable
• Litigation - Provides assurance that except as disclosed on a schedule, the company is not involved in any pending or threatened litigation
• Taxes - promises that taxes are paid current or reserved for in the financial statements
• Compliance with Law - Company is not in violation of any state, federal or local law

In a typical transaction, there will be exceptions or matters that need to be disclosed to make reps and warranties accurate. As a compromise between a buyer trying to minimize post-sale risks and a seller reluctant to make absolute blanket reps and warranties, the exceptions or limitation to the reps and warranties are set out on schedules referencing particular reps and warranties and attached to the PSA. Because these schedules alter the scope of the rep and warranty, it is important for the buyer to carefully review the contents of these exhibits.

While all parts of the PSA are important and should be carefully reviewed, the content and language of the seller's reps and warranties can have the most impact on both parties. Thus both buyers and sellers should take extra care to be certain that these reps and warranties properly reflect the deal as they understand it. (And, yes, a good attorney can really help you here..... :-))

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Is an employee with a non-compete or confidentiality agreement still bound by it after the employer sells the business to a new owner?  Can the new owner enforce such an agreement which was made between the employee who continues working for the company and the prior owner?

Everyone understands that before buying another company, lots of "due diligence" about finances, customers, products, and general business operations should be done.  While these are certainly important concerns, you must also not lose sight of the "human capital" in the form of employees that you will be inheriting regardless of whether you choose to structure the transaction as an asset or a stock transaction.  How can you be certain that key employees won't depart to work for a competitor?

You can of course "rehire" employees, taking care to have each of them sign new confidentiality and/or noncompete agreements.  But what about employees who simply decide they'd rather go work somewhere else than remain employed under new ownership?  In addition, inevitably, not all of the "rehires" will have signed the new agreements.  There may also be cases where it is simply not feasible to have everyone sign new agreements.  So the issue becomes whether the new owner can rely upon noncompetition and confidentiality agreements predating the change in ownership.

Ohio, like many other states, generally views noncompetition agreements with some degree of skepticism.  Confidentiality agreements must likewise be supported by good business reasons.  As a result, these agreements, while enforceable, will be strictly construed.

The same reluctant enforcement also applies to the ability of new owners to enforce noncompetition and confidentiality agreements made by the employee with the previous owner.  As one might expect, as long as a business merely changes its corporate form (as when a sole proprietor decides to incorporate), but otherwise remains the same with the same ownership  and operations, it has long been the law in Ohio that noncompetes remain enforceable.  Rogers v. Runfola & Assoc., Inc., 57 Ohio St.3d 5, 565 N.E.2d 540 (1991).  It's also fairly clear that if an employee simply chooses of his or her own accord not to work for the new owner, the new owner is permitted to enforce such covenants.  However, where there has been a change in ownership and the employee remains employed, it becomes more complicated.

When ownership of the business changes hands and the employee remains employed for a period of time, Ohio courts ask two basic questions: (1) whether it was contemplated that the noncompete/confidentiality covenant would be assigned; and (2) whether allowing the enforcement of the noncompete/confidentiality covenants against the employee is important to preserve the goodwill of the business sold.  See The Fitness Experience, Inc. v. TFC Fitness Equipment, 355 F. Supp. 2d 877 (N.D. Ohio 2004); Artommick Int'l v. Koch, 143 Ohio App.3d 805, 759 N.E.2d 385 (10th App. Dist. 2001). 

In answering the first question, it is not essential that the underlying noncompete/confidentiality covenant specify that it is assignable, but that is certainly helpful.  Courts have also found that a general assignment of the employment contract without specific mention of the noncompete/confidentiality covenant is sufficient.  In this regard, Ohio is more liberal than many other states which require affirmative provisions allowing assignment. 

In addressing the goodwill issue, Ohio courts may look at the underlying business as it exists following the change in ownership.  For example, in Relizon Co. v. Shelly J. Corp., the Court noted that the new owner had led the employee to believe that his customers would no longer be service dby the company and the Court thus concluded that since it was "unclear" what goodwill was being protected, the noncompete was unenforceable by the new owner.

For more information about how other jurisdictions address this issue, information can be found at 12 A.L.R.5th Enforceability, by purchaser or successor of business, of covenant not to compete entered into by predecessor and its employees.

 PRACTICAL COUNSEL:  

1. When preparing a noncompetition or confidentiality agreement to be signed by employees, be sure to include a provision allowing assignment of the agreement.  This can add value later if you want to sell the business.

2. Don't despair if there isn't a provision allowing assignment of the prior noncompete or confidentiality agreement, but recognize that this may be a loophole.  Some Ohio courts have also found the fact that the new owner tried in vain to have employees sign new noncompete agreements as supporting its conclusion that the prior agreements were nonenforceable so be careful about insisting on new agreements.

3. Don't give courts a reason to decide that allowing enforcement does nothing to preserve the goodwill of the business which has been purchased.  Consider adding something to the business purchase agreement recognizing the importance of the assignment of these agreements.  Be careful how quickly you phase-out marginal aspects of the business.

UPDATE: Murray v.Accounting Center & Tax Services, Inc., 178 Ohio App.3d 432, 2008-Ohio-5269 (Lucas Cty 6th Dist.) (discretionary appeal not allowed by Ohio Supreme Court) - Duration of noncompete agreement containing assignment clause allowing its transfer upon sale or merger of the company reduced to one year enforceability by new owner of company.

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