Protecting Your Business Purchase with a Non-Competition Agreement

Buying a business can be one of the most complex transactions that a person ever engages in.  There are seemingly endless details that need to be addressed, but from the buyer’s perspective there may be none more important than the non-competition clause.

Whether you’re buying a business on the open market, from a friend or relative, or taking over a business that you’ve been working for, what you want to get is the business you’re buying.  If the previous owner can just set up shop down the road, you’re probably not going to get a lot of the business you just bargained for.  That’s where the non-competition agreement comes in.

As a general matter under California law, agreements restricting someone’s ability to work are not enforceable.  This is because there is a public interest in avoiding “restraints of trade.”

There are a few exceptions to this general rule, and probably the most popular is a restriction in conjunction with the sale of a business.  You can have a valid contract preventing someone from engaging in a business similar to the one that was sold, within a specified geographic area that the business was being engaged in, and so long as the buyer continues to engage in that business.  As a practical matter, most such agreements also have a specified time limit on the restriction.

Determining the applicable geographic area and timeframe are two critical negotiating points from the buyer’s perspective.  Buyers want to ensure that the customers of the old business will not simply move to the old owner’s new business.  Of course, the risk will depend on the specifics of the situation: an owner who is about to retire and move out of state is a much smaller risk than one who is selling one of five locations and plans to keep running the other four.

The appropriate geographic area will vary considerably, as well.  Some businesses, particularly ones that operate largely online, may draw from the entire state or country, while others may not get real competition from more than a few miles away.

If you are thinking about buying or selling a business, this is only one of many concerns you should address.  Contact our office if you would like assistance in doing so.