Preserving Goodwill in your Business

Successful business owners invest significant time and money in building value in their business.  A well-run business can increase in value over time and can act as a retirement nest egg, which can be cashed in by way of selling the business when the owner is ready to retire.

Protecting the goodwill of your business is a key component of preserving value in the business.  Two areas where a business owner can be proactive in protecting this goodwill are through the use of trademarks/tradenames and the use of restrictive covenants with their key employees.  A business that offers quality services and products at fair prices helps build customer loyalty.  The customer goodwill that is generated creates repeat business and referrals.  The use of a tradename or trademark can help create “brand loyalty” that will add value when it comes time to sell the business and helps protect the goodwill of your business from being taken by others.  Technically, the term “trademark” means a symbol used with goods, while marks used with services are “service marks”.  For purposes of this article, we will use the term trademark for both.

Although trademark rights are enforceable without filing a trademark registration, it is simpler and less expensive to enforce trademark rights with a registration than without one.  Trademarks can be registered at the state level with the New Hampshire Secretary of State, affording protections in New Hampshire or they can be registered at the federal level with the U.S. Patent Trademark Office protecting rights to the mark throughout the United States.

As with a trademark, the use of a tradename can afford a business owner additional protection as to the goodwill behind the business.  Every business in New Hampshire, whether practicing as an LLC, corporation or a sole proprietorship, must register the business with the New Hampshire Secretary of State.  Once an entity or tradename is registered with the Secretary of State’s office, other parties are prohibited from making use of that name or a similar name in that industry.  A tradename, separate from the business owners business entity, is often one of the assets sold when selling a business.

An additional area that business owners don’t always take action in to protect the goodwill of a business, is the use of restrictive covenants with key employees.  There are three basic types of restrictive covenants, with first being the most restrictive and the last being the least restrictive.  These are non-competition agreements, non-solicitation agreements and confidentiality agreements.

A business owner trying to sell his or her business who has not used such agreements with the business’ key employees may run into difficulties finding a buyer for the business.  Often commercial lenders are unwilling to finance the purchase of certain businesses where key/essential personnel in the business are not subject to such restrictive covenants.

Presently in New Hampshire, the law requires that non-competition and non-solicitation agreements may only be used with employees if the employee is given a copy of the agreement at the time of or before the offer of employment is made or at the time of a change in job classification.  If not implemented properly, such agreements will be void as a matter of law.  There is however pending legislation before the New Hampshire Legislature to amend this law and make it easier for employers to impose such restrictive covenants, but such legislation has yet to become law.

As a business owner, the time is now to think about the value of your business and ways to ensure your hard work in creating goodwill will be preserved when it comes time to sell.  Should you have any questions or require assistance on these or similar issues, you may contact Attorney Douglas Mansfield at 603-778-0686.