Buying certain personal service businesses presents challenges unlike buying a manufacturer of widgets. The value in a personal service business may depend upon the relationship the owner has with his sold company’s customers.
Thus, the buyer risks buying a business where the customers walk out the door after the closing to follow the seller’s owner. So, a buyer will often hire the seller’s owner to keep the customers and obtain the owner’s promise not to solicit the seller’s customers after the owner leaves the buyer.
In this case a wealth management company purchased the wealth management business of another company. The buyer bought a business that depended upon the relationship that seller’s owner had with seller’s clients.
To secure the benefit of the deal, seller’s owner agreed to work for the buyer and not to solicit his sold company’s clients.
A couple of years later buyer announced that it was up for sale. A week later seller’s owner left buyer and worked for a competing wealth management company. The following week buyer was sold. The sale announcement sent out to buyer’s clients said that seller’s owner was no longer working for the buyer.
This resulted in a mass exodus of seller’s clients who ended back with seller’s owner. Buyer sued seller’s owner in a Nevada federal district court accusing seller’s owner of breaking his nonsolicitation promise.
Seller’s owner asked the court to throw the lawsuit out arguing that buyer’s allegations did not accuse the seller’s owner of soliciting his old clients. The buyer replied by saying that solicitation must have occurred because the buyer lost most of seller’s clients and they all ended up with seller’s owner.
The court said that the fact that seller’s clients ended up as seller’s owner’s clients was not enough to make a claim against seller’s owner for breaching his nonsolicitation promise.
This case is referred to Sentinel Rock Wealth Management, LLC v. Hartley, Case No. 2:16-cv-01643-MMD-VCF, United States District Court, D. Nevada, (February 28, 2019).
This case illustrates the risk of buying a business dependent upon a rainmaker. The risk may be high that the rainmaker may attract the seller’s customers after the closing without lifting a finger. In such a case, a nonsolicitation clause would not help.
However, the buyer in some states, like California, could get the seller’s owner to promise not to compete against the buyer for a reasonable period in the seller’s former market. California permits this to protect the goodwill that buyer purchased from seller.
Also, Seller’s owner was rewarded for not trying to contact his old company’s clients. He apparently let the customers come to him; and thus, avoided liability under his nonsolicitation promise.
By John McCauley: I help businesses minimize risk when buying or selling a company.
Telephone: 714 273-6291
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