Big Mistake

We all remember the scene in the movie Jerry Maguire when Jerry finally has had it with his client Rod Tidwell. He corners Rod in the locker room and makes the following emotional appeal:

I am out here for you. Help me help you.

You don’t know what it’s like to be ME out here for YOU!

It is an up-at-dawn, pride-swallowing siege that I will never fully tell you about, OK? Help me… help me, help you, Rod. Help me, help you. HELP ME…HELP YOU!

While my job is not always a “pride-swallowing siege,” I often find myself in similar conversations with clients. One area that I discuss more than I’d like is employment agreements. Like heart disease, they’re a silent killer. Not everyone will have issues with them, but those who do are often in for a real headache.

Coming from someone whose professional life is focused on building, measuring and monetizing value in pest control firms, I can tell you that employment agreements are important. Every decision you make as an owner impacts the value of your firm.

What you do with this information should be a pretty good indicator of what sort of decisions you’ll make in the future. So whether you are a Potomac client or not, in the words of Jerry Maguire, please, help me, help you.

EMPLOYMENT AGREEMENTS. Of the hundreds of pest control companies that I’ve looked at, only a small portion have actually engaged a competent professional (or even an incompetent professional for that matter) to think through and draft non-competition, non-solicitation and confidentiality agreements (collectively, “employment agreements”) that are appropriate for the company and the jurisdiction in which it operates.

The extreme majority of pest control companies lie somewhere between having done absolutely nothing at all to half-a**in’ it, giving themselves a tremendous, but very false sense of comfort and security.

So I ask:

Are you using crummy boilerplate employment agreements that you’ve downloaded from PimpMyLegalDocs.com or some other internet extravaganza of largely worthless — and sometimes dangerous — agreements that are in no way tailored to your business, let alone the jurisdiction in which you operate?

Or maybe you have nothing, nada, zip, zilch in terms of employment agreements.

Perhaps a buddy in your blind-leading-the-blind industry peer group who operates on the other side of the country gave you some boilerplate documents to use, saving your cheap self the grand it would have cost you to protect your $10 million business?

Maybe you’ve simply “borrowed” agreements from your former employer when you left 30 years ago to start your own business and never got around to engaging an attorney to draft proper agreements?

If your former employer is like most companies, those agreements weren’t worth the paper they’re printed on 30 years ago — and now you’re using them.

Maybe your agreement looks something like this pest control company’s “employee non-compete agreement” pile of rubbish (see top right).

Sooner or later garbage documents like this will end up biting you in the rump, when it’s far too late to do anything about it. If this is you, it’s time to take a little break from running the day-to-day, get your act together and put an active stop to this. In the words of Dexter, my favorite make-believe serial killer, “The sins of the father go on and on, from kid to kid to kid, unless someone — you — chooses to end them.”

Why Should I Care? When an M&A deal is announced in the pest control industry, everyone wants to know:

• “How much did they pay?”
• “What was the multiple?”
• “Was there a holdback?”
• “Hmmm…if that guy can get that kind of money for his rubbish business, I wonder what I could get for mine?”

Everyone sees the same standard announcement about why the seller chose the wonderful acquirer and how the acquirer “is the best home for our people and customers,” and “shares the same values.” Yawn.

The seller shows up at NPMA PestWorld or other industry conferences basking in the glory of his new-found wealth with no apparent care in the world.

What you don’t see, however, is the seller, two weeks before the closing, spitting up blood at 4 a.m. from a stress-related ulcer that gets worse by the minute because a key employee left and is poaching his people and accounts.

You don’t see the seller, a grandfather at this point in his life, sobbing at the kitchen table on the eve of the closing. His two top managers — with no enforceable agreements in place — each demanding a half million bucks “in a bonus for devoting our lives to building this company for nothing while you get rich…pay us or we walk and the deal craters.” (Yes, these are actual events.)

But more painful than that is the deal that could have been. Or the blockbuster price that should have been. You never see the behind-the-scenes discussions in the boardrooms in Memphis, Atlanta, Orlando and London, such as, “With no assignable non-competes, we’re dead in the water if management walks…let the other acquirers duke this one out, it’s too risky for us at this valuation.”

And just like that, the highest bidder retreats into the background. Like the proverbial tree that falls in the forest and no one was there to hear it…an opportunity vanishes in the blink of an eye…and in some cases, a tragedy when you, as a business owner, work your whole life to do everything right and something so wrong happens.

These agreements become important when you least expect them to.

I recently was in the process of negotiating a $15 million pest control transaction and the acquirer called me up and said, “We’ve got a problem, your client does not have proper non-competition agreements in place for some of the states in which they operate.”

The acquirer was absolutely correct.

I knew they were right, but in a preemptive acquisition scenario you don’t always have the time to get things in order, especially when your client is like most business owners out there and doesn’t prepare. So we had to scramble and it wasn’t a fun situation to be in.

What are you going to do if an acquirer calls you tomorrow and says, “Hey, we want to pay you more for your business than any other acquirer would dare to pay, but we’ve got to do it right now.”

This really does happen. Some of the highest valuations in the world come from preemptive offers when you least expect them.

Unfortunately, one important area of improvement for most pest control companies is their lack of proper agreements in place. By not having these agreements in place you are potentially impairing the value of your business by making it riskier to own. When risk increases, value decreases.

The good news is, there is a relatively quick and affordable solution to even the worst documentation issues if you’ve got time on your side.

HOME PARAMOUNT CASE. Issues surrounding employment agreements are certainly not restricted to M&A transactions. The court systems are littered with pest control related non-competition lawsuits. In fact, in the state of Virginia, the “three-part test” the courts have used for 20 years is a result of the Paramount decision, the seminal Supreme Court case, Paramount Termite Control Company v. Rector (1989).

For 20 years, the Paramount decision was the law of the land in regard to non-competition agreements in Virginia. That is, until the Supreme Court heard another case, ironically, including one of the same parties, Home Paramount, in Home Paramount Pest Control Companies Inc. v. Shaffer (2011). What’s most interesting about the case of Home Paramount is, in 1989, Paramount Pest Control sued a former employee for violating his non-competition agreement and won, making it a seminal case on the enforcement of non-competition agreements. Coincidentally, 20 years later, the same Court ruled against Home Paramount for…wait for it…the exact same non-competition agreement.

The Home Paramount case provides a vivid warning to us all: Laws change and what worked 20 years ago or even last year, might no longer work. So you’ve got to stay current with the law.

Back in 2009 I wrote an article called “Buyer and Seller Beware: The Assignability of Contracts in the Context of M&A.” I warned about the assignment of non-compete agreements in the context of an M&A transaction. After publishing that article, one of the deal teams of one of the five largest pest control acquirers in the world came to me and said, “That article changed the way that we look at non-compete agreements and we’ve since changed what we require of a seller.”

There is not a single M&A transaction in the pest control space I’ve worked on where an acquirer did not inquire about employment agreements almost right out of the gate. In fact, this is not just in North America, I’ve advised on transactions in Italy, Germany, Brazil, Singapore, Australia, the UK, etc., and one of the first things that acquirers want to understand are the non-competition, non-solicitation and confidentiality agreements in place.

We looked at our valuation, exit planning and strategy consulting clients over the last five years and less than 15 percent of them have (or had) proper employment agreements in place, yet 100 percent of them will ultimately deal with them when they sell their business.

MAKE AGREEMENTS AIRTIGHT. Important Note: The law of the land where your business operates is what governs employment agreements. Your state, province, canton, city or country might outlaw certain points that I make on the following page. In fact, in certain jurisdictions, including some of this stuff might invalidate the entire agreement, or worse, make the agreement illegal, so please, please get competent legal advice. Further, I am neither an attorney nor do I play one on TV, so, this isn’t legal advice.

So what should you do?

Well, spending a few hundred bucks now might literally save you thousands, and in some cases, millions of dollars in the future. My suggestion to you is that you find a labor and employment attorney in your jurisdiction that is an expert on these matters. One wrong sentence in these agreements and the courts can and do strike them down. So if you’re going to pay to have someone draft them, then you might as well go to an expert.

Key points that you might want to ask your attorney:

• Does this agreement protect me from current and former employees soliciting my employees?
• Does this agreement protect me from current and former employees soliciting my customers?
• Does this agreement protect my trade secrets? Clearly you don’t have the recipe for Coca-Cola Classic that you’re trying to protect, however, you’ve spent a lot of time designing and creating propriety processes, methods and “plans” which you don’t want put to use by a direct competitor.
• Is this agreement assignable? If so, is it assignable without having to secure the consent of the employee? You don’t want to find yourself in a position where you have to ask your employees permission to assign the agreement.
• Have we (the company) provided sufficient “consideration” in order to make this agreement legally binding?
• Is this agreement enforceable based on geography and scope?
• Does this agreement require the employee representative and warrant “that he is not subject to any prior employment agreement which would prevent him from entering into this Employee Agreement or performing his duties and obligations hereunder.” How do you enforce a non-competition agreement without suing your former employee? You sue his new employer for tortious interference with a contract. A clause like this keeps you out of hot water if employees have obligations to other firms.

By going through the above checklist with an employment lawyer and getting these agreements in place you’ll be ahead of the majority of the industry.

Employment agreements, in a lot of ways, are like insurance policies. You don’t need them until you need them. If you (or your family) are ever in a position to sell your business to a third party, you’ll want to have appropriate agreements in place. Take a few minutes now to make sure that you’re on the right track.

Paul Giannamore is managing director of the Potomac Company and veteran of the M&A scene. Learn more at www.potomacpestcontrol.com.