Thursday, April 21, 2011

Sales Manager and Sales Rep "CNTC" issues related to Mergers and Acquisitions

Below, I’ve copied into this post a portion of an article I came across while visiting The article dealt with Merger & Acquisition “issues” (several different issues), but the portion I’ve cut from the article deals specifically with the “sales team” of the company that’s being considered for merger or acquisition (in other words, the sales team of the “seller.”)

When you buy a company, one of the greatest concerns, if not the greatest concern, is “will the company’s sales manager(s) and sales reps stay on with you, after you acquire the business, or, will they leave the company …. and take accounts with them?”

This, of course, assumes that most of the customers of the company-to-be-acquired are not under binding contractual commitments to continue to do business with the company, even if it is sold to, or merged into, another company. To the extent that customers do have contractual obligations to continue doing business with the company that’s being sold or merged, I would think that the concern about sales managers and sales reps would be somewhat less than would otherwise be the case if customers did not have any contractual obligations.

Of course, the “ideal” (Utopian) situation would be that, when a business is acquired, all of its customers and business will “stay put.” Sometimes that does happen, but, realistically speaking, that sometimes does not happen. Buying a business, or acquiring a business through a merger transaction, certainly has risks, many risks for that matter. To “insure” against the risk of loss of customers (the business customers generate), acquiring companies often, if not always (unless they’ve naively overlooked this issue) look to “covenant-not-to-compete” agreements (CNTC’s). (I, myself, have a CNTC, which stemmed from the sale of NGI to ARC in December 2007. Mine’s for 5 years. I also got stuck with a 5 year CNTC when we sold our first company in 1988.)

CNTC’s are valid in some states, but not in others. Quite frankly, I don’t see any reason why validity should vary state by state. But, that’s simply my own personal opinion.

Below, you will notice that the author (of the article that I earlier referred to – and you’ll find a link, below, to the full article) “suggests” that the buyer may want to talk directly to the seller’s salespeople (this, prior to consummating the purchase or merger transaction.)

About that suggestion that the author made, here’s my suggestion to prospective “sellers” ……It would probably be a good idea, before the seller allows the buyer to talk to the seller’s sales manager(s) and sales reps, to have the buyer agree to a “not-contact, not-pursue, not offer, not-hire” agreement with respect to the seller’s sales manager(s) and sales representatives. If there is no such agreement and if the deal falls through, what’s to prevent the “buyer” from hiring all of the seller’s sales manager(s) and sales reps (presuming they don’t have a non-compete)? And, even if the sales manager(s) and sales reps do have CNTC’s, I think that getting an agreement from the buyer “not to screw with” your sales manager(s) and sales reps, if the acquisition / merger deal falls apart, would be a smart thing to do. Certainly, some will disagree with my viewpoint on this issue.

Here’s the portion of the article I mentioned:

If You Build It, They Will Come (Maybe)

In any M&A transaction, nothing is more crucial to cement than the loyalty of the seller’s sales force. In cases where some or all of the sales force does not make the transition to the new owner, non-compete agreements can afford a measure of protection against loss of business from the accounts that these salespeople were handling. But, say NDP and MargolisBecker, non-compete protection isn’t as good as persuading everyone on the sales team to come along.

In any M&A transaction, nothing is more crucial to cement than the loyalty of the seller’s sales force.

There is no downside for the owner in obtaining non-compete agreements from salespeople, but non-competes are not absolute guarantees. It’s easier to enforce them in some states than in others, and there are circumstances in which it is nearly impossible to make them stick. Unless salespeople bound by non-competes are being compensated, invoking the agreements can be difficult.

When structuring the transaction, the better approach is to talk with the salespeople about what is happening and why staying on board will be advantageous to them. The buyer should conduct face-to-face meetings with the salespeople early on in the process and get them excited about joining the new company. When steps aren’t taken soon enough to head off defections, having non-compete agreements neither helps nor hurts.

The same kind of thinking applies to the decision that the buyer will have to make about the seller’s management team: should they be kept on, or should they be retired to avoid conflict with the new management structure? If the buyer believes that the seller’s managers are ineffective, then there are grounds for letting them go. On the other hand, if they possess skills that the buyer could use going forward, then their continued participation is a good idea.

The buyer should think about prospect of competition from personnel it chooses to cut loose. In the long run, it may prove wiser to keep them in the fold.

The buyer should also think about prospect of competition from personnel it chooses to cut loose. In the long run, it may prove wiser to keep them in the fold, especially if they have knowledge that differentiates them. Once separated, they can’t be stopped from going elsewhere. They are either going to join the merged company, or (absent agreements to the contrary) they are going to compete with it.

Here’s a link to the full article:

Devil in the Details: Issues and Answers in M&As

By Patrick Henry

Published: April 21, 2011

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