In most middle-market aerospace and defense transactions, initial negotiations focus primarily on the price. Usually, little attention is given to restrictive covenants until late in contract negotiations. However, for some sellers, this can be a contentious issue. In the case of small privately held and run aerospace and defense companies, most buyers will require the selling owners to agree not to compete with their company for a period of time after the sale.
Duration: These non-compete agreements typically have a duration of three to five years following closing, in large part depending on the laws of the relevant state. Sellers may want to push back against longer terms if they are not retiring and may want to return to the industry in some capacity in the future. Sellers should resist terms that exceed market practice.
Scope: As with Duration, depending on the future plans of the seller(s), it might be appropriate to push back on the scope of the non-compete, specifically with the aim of limiting the scope to cover just direct competitors of the business today. While we have heard of some sellers trying to limit the geographic coverage of these agreements, we find this to be of limited interest to buyers, given the global nature of the aerospace and defense industry.
Tax Treatment: Sellers should talk with their tax advisors about these agreements, because the portion of your sale price that is allocated to these agreements might be taxed as ordinary income rather than at capital gains rates, as discussed in Deal Note® 32 and Deal Note® 35.
As with most deal terms, a seller’s leverage on these provisions is highest before signing a Letter of Intent and diminishes thereafter.
Have a great day,
Max McFarland
Associate
