🎯 M&A Deal Points | FTC non-compete ban I recently had the chance to to sit down with Justin Harvey of APM Wealth on his APM Success podcast to discuss the new FTC non-compete rule. Some key takeaways ⤵ ⏪ The FTC rule essentially provides that (1) employers can't enter into new non-competes after the effective date (September 4, 2024, subject to court intervention), (2) existing non-competes are unenforceable after the effective date, except for senior executives (for whom new non-competes cannot be entered into), and (3) employers must notify workers that their non-compete agreements are no longer in effect and won’t be enforced. 🛑 Generally speaking, the rule does NOT apply in the context of a sale of a business / equity ownership. 👉 Focusing on healthcare, this rule will generally free most employee-physicians (apart from senior executives) from non-competes. 👉 Most physicians are not senior executives under the rule because they will not be considered to be in a business policy-making position for the overall enterprise. 👉 Non-profits (including non-profit hospitals and non-profit physician groups) are outside of the FTC's purview, and the rule won't apply to them or their employees. BUT the FTC has stated that it won't rely on IRS tax status (❗), and it will independently probe whether an entity is set up to make a profit. So, there could be a subset of IRS tax-exempt orgs that will be considered for profit by the FTC for purposes of the ban. 👉 The ban is directed to relieve employees not owners. The rule does not apply in bona fide sale of business contexts, no matter the ownership-percentage level. The FTC has also indicated that this exclusion would likely apply to non-competes in connection with partnership buyouts. That likely means non-competes entered into before the buyback transaction - springing non-competes - are likely outside the ban's reach, but it's not entirely clear. The transaction cannot be a sham for purposes of avoiding the prohibition. And remember, if the FTC rule doesn't apply, state rules still do. 👉 There are already lawsuits challenging that the FTC overstepped its authority, and the effective date of the rule is likely to be delayed. 👉 Given the judicial uncertainty, the best tact at the moment is to analyze a non-compete under state law, realizing that it may be unenforceable if the FTC rule is upheld. ✂ Remember this cuts both ways. SMB owners are now faced with the prospect of building up the reputation and skills of an employee in a community at their expense, and then having them leverage that to open up shop next door. This is much more burdensome on SMB vs middle-market and public companies. 🎙 Check out the full podcast here (or on Apple Podcasts):
FTC Pushes To Make Noncompetes Illegal - Here's What It Could Mean w. Scott Weavil
https://www.youtube.com/
Justin Harvey
6mo
Scott, thanks as always for coming on and sharing your wisdom. :)
Spencer May
6mo
listening!
Managing Partner @ Candor Advisors | Investment Banking
6moGreat stuff, Scott! Thanks for sharing!!