The Federal Trade Commission (FTC) has imposed new restrictions on noncompete agreements, which could have significant implications for family businesses and their estate planning. Noncompete agreements are a common practice that limits employees from accepting new employment or starting a competing business after leaving their current employer. The FTC estimates that 30 million workers, or 18% of the workforce, are currently restricted by noncompete agreements. The new rules aim to promote competition and increase employee compensation, but they may pose challenges for family businesses with succession plans in place.
The new FTC restrictions create an all-encompassing ban on noncompete agreements for all workers, effective 120 days after the rules are published. Existing agreements will no longer be enforceable for employees who are not senior executives. For senior executives earning more than $151,164 and in a policy-making position, existing agreements can remain in force, but new agreements will not be permitted. This could impact succession planning for family businesses, as restrictions on key employees may no longer be enforceable.
A sale of business exception allows employees to sell their business interests without being subjected to noncompete agreements. However, this exception may not be practical for many family businesses, as it requires a bona fide sale between independent parties. The FTC’s definition of noncompete agreements is broad, encompassing confidentiality and non-disclosure arrangements that restrict employees from seeking employment elsewhere. Employers are required to give clear and conspicuous notice to affected employees that noncompete agreements will not be enforced.
Valuation considerations are important for owners of closely held family businesses, especially as estate, gift, and GST exemptions are set to be reduced. The loss of noncompete agreements may impact the value of the business and could affect estate planning arrangements. While the FTC’s restrictions on noncompete agreements aim to benefit employees, they may create challenges for family businesses and their succession planning efforts.
In conclusion, family businesses should carefully review and revise their business succession plans in light of the new FTC restrictions on noncompete agreements. The impact of these changes on business continuation goals should be monitored, and adjustments should be made accordingly. It is important for business owners to consider how these restrictions may affect their estate planning and take steps to protect their business interests and succession plans.
