Non-Compete Agreements

When a business changes hands, most buyers expect you to sign a non-competition agreement, or non-compete for short, at closing. Few buyers will purchase a business without a commitment from you to not compete with them after the business is sold. Determining the terms of a non-compete is an integral part of the process of buying or selling a business, especially if you don’t plan on fully retiring and would like to avoid closing off any options. 

Non-competes are more heavily negotiated in certain industries, such as professional practices or service-based businesses, where you may retain a strong ability to compete with the buyer after the sale. They aren’t as important in other industries where replicating the business would be difficult for you after the sale, such as industries involving a large investment in infrastructure – storage facilities and hotels, for example.

Few buyers will purchase a business without a commitment from the seller to not compete with them after the business is sold. 

Scope

The time frame for most non-competes usually varies from three to five years. The geographical area covered by the non-compete typically coincides with the market area served by the business. For example, if a business’s customers come from a 50-to-100-mile radius, most parties will negotiate a 100-mile non-compete.

Often, the seller has no intention of re-entering the business. In these cases, most sellers offer a liberal non-compete, such as for five or more years, and covering entire counties or states. Some sellers tell me they’re willing to offer the buyer a 100-year non-compete.

Staying Involved

What if you want to stay involved in your business?

If you’re selling your company and want to remain in your business or industry, it’s best to express your intentions to the buyer clearly. Discuss your plans with the buyer and the role you would prefer to play after the sale. An experienced attorney can then draft a non-compete that expresses your mutual agreement. Your attorney will help you prepare a definition of a competitive business that carves out any activities you hope to engage in the future.

A non-compete should be specific as to what activities are permitted. A well-drafted agreement will clearly define a “competitive business” and define the capacity in which you can be involved, for example, as an employee, owner, or other position. Competition can be either direct, as in an owner, or indirect, as in a passive investor, and can come in many other forms. This definition can also be inclusive – for instance, “The seller is allowed to…” or exclusive, as in, “The seller is prohibited from…”. Again, an experienced attorney will ensure your agreement meets both parties’ needs.

Enforceability 

Some experts believe a shorter non-compete is more enforceable, although the degree to which this may be true varies from state to state. Most experienced attorneys agree that a three-year non-compete is enforceable. In some states, such as California, non-compete agreements are illegal in certain situations, such as an employer-employee context. A non-compete in the sale of a business is legal in all 50 states. Most states also develop parameters of reasonableness that can be researched in both statutes and case law. 

Other Considerations 

The buyer and seller should also ask themselves the following questions regarding the non-compete:

• Am I the only one obligated to sign the non-compete, or is my spouse also asked to sign? 
• Is the non-compete assignable if the buyer sells the business later? 
• Is the non-compete revocable if I finance a portion of the sale and then the buyer later defaults? 
• What are the methods of enforcement and remedies for violation? 
• Can I work as an employee for another company after the sale? 
• What types of businesses can I engage in after the sale? 
• Does the non-compete restrict solicitation of the employees, customers, and vendors?