The Role and Importance of the Non-Compete When Selling Your Business

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The Non-Compete Agreement Is Critical Business Sales

A non-compete agreement in the context of business sales governs the extent (in length and geographic breadth) to which the seller of the business may ‘compete’ with the buyer’s business after the closing. In general terms, Florida statute and courts enforce non-competes so long as they are ‘reasonable’ and serve to protect a legitimate business interest of the party seeking to enforce the non-compete agreement. Within this context of enforceability, buyers and sellers of businesses frequently negotiate the non-compete as buyers wish to protect themselves from unwanted competition and sellers will want freedom to conduct business in the future.

Buyers of Business Use Non-Compete Agreements to Protect Their Interests

If a buyer values the business’s brand, customers, employees, or general goodwill then they will generally want the seller of the business to give them a broad non-compete. The buyer will wish to protect the intangible assets they have just purchased and – for as long a time as legally permissible – they will want the seller to not compete or interfere with the buyer’s business operations.

The buyer certainly will not want the seller (after the closing) to do any of the following:

  • Open another competing location.
  • Re-hire the business’ employees.
  • Solicit existing customers or future customers of the business.
  • Advertise themselves as competing with the business.

Seller’s Role in the Business A Critical Factor

The buyer will be more likely to insist on a broad non-compete agreement if the seller plays a significant role in the business. For example, if the seller has personal relationships with the customers or employees of the business, then the buyer will usually be very adamant about a strong non-compete agreement in place that prevents the seller from returning after the sale and using these relationships to damage the buyer’s business.

Sellers Desire Freedom to do Business in Similar Industry After Business Sale

Some sellers of businesses – because of their advanced age or limited ambition after the sale – simply do not care about the non-compete agreement, and will be happy to give as broad a non-compete as is legally permissible. For those sellers that do wish to do business or be employed after the sale in a similar industry, then this will be a critical issue in negotiating the transaction.

Factors for Sellers in Negotiating More Favorable Non-Compete in Business Sales

  • Sellers should try to limit the geographic scope of the non-compete agreement.
  • Arguments can usually be made that a distance of ten or even 5 miles from a retail-oriented business such as a salon or restaurant would not necessarily compete with that same business. Customers like to stay in a tight geographic distance.
  • Sellers should try to limit the length of the non-compete agreement.
  • Courts may invalidate the length of the non-compete agreement if it is ‘unreasonable’.
  • Sellers may argue that the buyer will have the resources and experience necessary to properly compete with the seller (or anyone else for that matter) after a few years at most, so a non-compete after too long of a time period is simply unnecessary.

Family Members of Sellers in Non-Compete Agreements for South Florida Business Sales

Sometimes, the buyer will want the seller and their entire family to be subject to the non-compete agreement. If the seller’s spouse or family member works in the business then the buyer will not want future competition from that person’s work or business dealings.  Normally this is understood and agreed upon since the spouse or family member works in the same business that is being sold.

Family Members Who Do Not Work in the Business

In unusual situations, buyers sometimes insist that all of the seller’s immediate family members – whether they work in the business or not – are covered under the non-compete. Buyers are aware that some sellers may – after the closing – form business entities where their family members (rather than themselves) are the legal owners. For this reason, the buyer will want the entire family covered under the non-compete.

Address the Issue in the Letter of Intent for Every Business Sale

Because the non-compete is such a critical component of the deal, it should be addressed as early as possible in the sales process. Sellers should have an idea of what non-compete they are willing to give, and buyers should formulate an idea of what non-compete they desire. A competent business broker should then insist that the non-compete agreement be addressed when the first written offer and acceptance of the deal occurs, or typically when a letter of intent is signed.  The earlier the issue is addressed – as always – the better!

Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.

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