Non-Compete Agreements in Business Sales (Part 1 of 3)

Non-Compete Agreements in Business Sales (Part 1 of 3)

Articles, Non-Compete Agreements, Small Business

Ever hear this?
“Non-compete agreements are not worth anything.”

It astounds me how many people believe this. Because just the opposite is true. Repeat … the opposite is true. Non-compete agreements are commonly used in two contexts:

  1. sale of a business (i.e. the seller/owner agrees not to compete after the sale) and
  2. for employees and independent contractors. (We’ll cover the later in the next issue.)

Non-compete agreements are a routine part of any business sale. If your business is a corporation or an LLC, then you, as the key employee and owner/shareholder, will be expected to sign a non-compete agreement. If you are the buyer, you have every right to expect a strict non-compete from your seller’s shareholder/owner(s); and in larger transactions the key employees may be required to sign one as well.

In a business sale, the non-compete must be separately purchased, i.e. the person who agrees not to compete must be paid directly for that commitment. Therefore, if you are a buyer, be certain that a separate check goes to each person who signs a non-compete. If you purchase from an entity (i.e a corporation or LLC) remember that the shareholder/owner/employee who agrees not to compete is not the seller. Therefore, you need a separate non-compete agreement with each of those people individually even if your purchase contract is with a sole shareholder/owner.

As the seller, you may think, “I’ve heard these non-compete agreements aren’t worth anything, so I’ll just sign it to ‘go along.’ ” Then you discover a year later that your buyer didn’t keep all of your employees (as he promised) and he’s started selling inferior products or services. A couple of customers call and tell you “it’s not the same; we need you back.” You can’t stand “your” business being run that way. You never treated your customers like this! You need to get back into the market to put “honesty” back into the industry! That non-compete agreement shouldn’t keep you on the sidelines while your old customers are being cheated right? …. WRONG. Courts have absolutely no sympathy for former owners who have a change of heart. Non-compete agreements are enforceable.

Stay Tuned for Part 2… Non-Competes for Employees and Independent Contractors.