When negotiating your business sale price the discussion about a non-compete agreement will eventually happen.  A non-compete agreement is illegal in California but legal in most other states, so you will need to check your state laws when negotiating this.   Like most laws in California, there are two exceptions to the non-compete laws and that is between partnerships and when a business owners sells their company.  The law allows for a non-compete if the business owner sells their interest, stock or assets, in the company they own.  This is legally enforceable with the general understanding that the contract cannot be so limiting that the seller cannot find work.

I am not a lawyer, just an entrepreneur who has been through this, and the legal standards that validate this contract assume that if you limit the type and location of work by the seller, it needs to be reasonable and justifiable.  One of my clients was an auto repair shop where the partners decided to split up.  One partner, who was buying out and keeping the existing company, wanted to have a non-compete clause in the purchase and sale agreement.  The non-compete would likely not be enforceable if it included the whole state of California, for a 20 year term and any type of auto repair work.  This contract would be to restrictive and would limit the seller in finding another job and is not realistically needed to defend the existing businesses interest.

Most non-competes are limited in time (usually 1-2 years with 5 yrs on the outside), limiting on the location (usually 10-30 miles) and usually limiting the service provided (this needs to be specifically defined).  Generally, the courts are not supportive of limiting commerce and someone’s ability to find work, so you need to be very specific in the terms of the agreement.  You cannot force the seller to agree that they will not complete anywhere in world, for the next 50 years.  To make it enforceable it must be tailored to your buyers requirements and should be crafted by an experienced lawyer.

The reality is that just because you have a non-compete, and it’s enforceable, it doesn’t mean that you have the money and time to defend it.  The problem with some the legal contracts is that being right doesn’t mean that you will win and my definition of win is when the cost exceeds the expense.  Many times as a small business owner I have been contractually right, but the amount of damages I would realistically receive would not exceed the legal costs of going winning.  Then, taking into consideration the time and emotional energy the legal process takes, let me tell you form experience, it better be a big pay off at the end if you want to enforce it.   Just be aware that the buyer just financed everything they have personally to buy the company and is working 60 hour weeks just to keep it alive.  You might have the legal right to keep them from competing with you but honestly, no one but lawyers win in lawsuits.

Don’t misunderstand me, you should have a good, enforceable, non-compete in the purchase and sale agreement but just be honest with yourself that it’s really only a piece of paper.  You could be spending time and money protecting and defending your legal rights and if you are not prepared to do that, then save the legal fees.  In my experience is not about being right but whether it is worth the time and money.

In summary, I would encourage you to have a narrowly tailored agreement written by a professional, knowing that it is better to have it in place and not enforce it , then wish that you had it later.

This entry was posted on Friday, November 6th, 2009 at 3:55 pm and is filed under Strategic Advisors, Sell Your Business, Professional Advice, Exit Stories, Exit and Answers. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.