If you are considering buying or selling a business, you may have contemplated signing a non-competition agreement. These specific contracts are designed to offer protection for both the buyer and seller, ensuring both the ability to earn a living after the sale is complete. While warranted in some occasions and ill-advised in others, non-competition agreements must be carefully written, precisely reviewed and legally documented to offer the proper security to both parties. To aid you in deciding whether such a contract is needed in your situation, here are some answers to frequently asked questions regarding non-competition agreements.
1. How Does a Non-Competition Agreement Protect Me When I Buy a Business?
Non-competition agreements are designed to protect the buyer’s interest in his or her new business. Without one, a seller can legally open up shop in the same industry right down the street. The possibility of losing clients they just paid to gain, leads many buyers to require some kind of agreement during the sales transaction. These contracts, if worded correctly, exclude the seller from opening a new, competing business within certain parameters. Traditionally, a protected geographic area is given and often a timeline for expiration of the agreement is set forth, allowing the buyer enough time to get established in his or her new industry and develop relationships with clients that won’t be easily severed by solicitation by the seller.
2. How Does a Non-Competition Agreement Protect Me When I Sell My Business?
While non-competition agreements can seem like they favor protection for the buyer that certainly doesn’t have to be the case. The key to drafting a mutually-beneficial agreement is to include as many specifics as possible. Stating very detailed terms within the contract decreases the likelihood of a disagreement after the transaction. For example, a seller should specify the exact municipal limits, or geographic radius that he or she agrees to avoid when opening any new, related business ventures. Additionally, if the seller has other existing businesses, those should be excluded in the terms of the agreement to avoid confusion. Another way to add specific protection for the seller is to limit the types of products the agreement covers. If the business in question is a sandwich shop, the agreement should limit the seller’s ability to open up a new sandwich restaurant, but not exclude them from creating an establishment that serves other types of foods.
3. When Should the Non-Competition Agreement Be Signed?
It is essential that a non-competition agreement be signed prior to or in conjunction with any other sale or employment transactions. In order to be legally binding, non-competition agreements must meet three qualifications:
- Be reasonable in geography, time and scope
- Protect a genuine business interest
- Be reinforced by consideration at the time of signing
The third requirement stresses that the person agreeing to withhold competition must receive something of value in return for his or her signature. In the sale of a business, the purchase price would be the consideration. Some employers require new-hires to sign an agreement to protect trade secrets or other confidential information. In these cases, the offer of employment is regarded as the consideration for the agreement. Employers may not legally require current employees to sign such agreements without offering them something of additional value.
4. How Does a Non-Competition Agreement Differ From a Non-Solicitation Agreement?
Non-solicitation agreements only specify that the seller will not approach current customers or employees of the buyer’s business. They may also list the specific products that are excluded from competition.
5. Do I Need a Lawyer Before I Sign a Non-Competition Agreement?
States have varying laws regarding non-competition agreements and courts have decided cases with differing results when such contracts have gone sour. Consulting with a lawyer is the best way to ensure that the language and scope of the agreement are within the bounds of the law, and that the interest of both parties is protected.
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