The Washington State Legislature has just declared “… all noncompetition covenants are void and unenforceable.” In the same statute, the legislature substantially restricted a business’ ability to enforce nonsolicitation agreements. The statute goes on to provide that all employers must notify all current and former employees and independent contractors that their noncompetition agreement is unenforceable.
In most business combinations, whether by asset purchase or stock purchase, the business is more valuable if it has substantial goodwill. Goodwill is an intangible asset of a business and reflects such items as reputation, customer loyalty and staff experience. The better the customer and staff loyalty of a business, the more goodwill a company owns. In other words, a business with greater goodwill is more valuable than a company with less goodwill.
Neighboring states, such as Idaho, expressly permit noncompetition and nonsolication agreements. If a Washington company cannot protect its goodwill, but an Idaho company can, the Idaho company will likely be more valuable (all other things being equal). It will be interesting to see how business appraisers, lenders and the market react to this new declaration.
Disputes over noncompetition agreements and nonsolicitation agreements are common. With the declaration by the legislature that noncompetition agreements are unenforceable, those disputes may become less common. Fewer disputes may enhance business value.
It is not clear how the legislature’s broad declaration will impact the statutory duty not to compete among members of a limited liability company, which could hurt value. It seems the legislature has determined that employees and independent contractors can compete, but LLC members cannot.
At Beresford Booth, we do a great deal of asset purchases, stock purchases and business structuring to enhance value. We can help your business comply with the new statute and protect its goodwill and enhance value. Please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.