Explore the legal intricacies of safeguarding goodwill in M&A transactions through a real-life tale of a key employee facing restrictive covenants in the acquisition of 29 franchised auto service stores. Delve into the legal battle, court decisions, and the implications for M&A practitioners.
M&A Stories
December 11, 2023
In the realm of M&A, buyers often compensate key employees with substantial sums in exchange for restrictive covenants, a practice subject to the scrutiny of reasonableness.
Here’s a tale involving a crucial figure in the acquisition of 29 franchised auto service stores. This seasoned employee, with a 20-year tenure, climbed from managing one Atlanta store to overseeing 18 stores across Georgia.
In 2021, the buyer sought to convert these franchised stores into corporate-owned entities through an asset acquisition. The key employee received $2 million, agreeing not to compete within a five-mile radius of any of the buyer’s 1,100 nationwide stores for four years.
Post-sale, negotiations for the employee’s role in the merged business faltered. The buyer’s offer, with reduced compensation and increased travel demands, led to the employee’s resignation.
Despite the ongoing covenant, in August 2021, the employee explored opportunities, considering an independent repair shop within the restricted radius. Requesting permission from the buyer, he faced denial, triggering legal action.
The legal battle unfolded in an Atlanta federal district court. Seeking a preliminary injunction, the employee argued the unreasonableness of the four-year term and nationwide restriction, resulting in a modification. The court reduced the term to two years and confined the noncompetition area to a 5-mile radius around the 18 supervised stores.
An appeal followed, with the appellate court deeming the four-year term justified due to the employee’s key role and the $2 million compensation paid as part of the acquisition. It upheld the district court’s adjustment of the noncompetition area.
Case Reference: Baldwin v. Express Oil Change, LLC., No. 22-10611 United States Court of Appeals, Eleventh Circuit (December 6, 2023).
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Podcasts https://www.buzzsprout.com/2142689/12339043
Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
Legal Disclaimer
The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.
Recent Comments