The Importance of the Non-Compete When Selling Your Business

The Non-Compete Agreement Is Critical to 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 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 Use Non-Compete Agreements to Protect Their Interests

A buyer who puts a high value on the brand, customer list, or general goodwill of a business will generally want the seller to give them a broad non-compete. The buyer will wish to protect the intangible assets that they are purchasing by preventing the seller – for as long a time as legally permissible – from competing or interfering with the business operations after the sale.

After the sale, the buyer will want to prevent the seller from:

  • Opening another competing location.
  • Re-hiring the business’ employees.
  • Soliciting existing customers or future customers of the business.
  • Advertising 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. This prevents the seller from using these relationships to damage the buyer’s business after the sale. If the seller is more absentee, then a non-compete will be less of a factor.

Many Sellers Desire Freedom to do Business in Similar Industry

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. Many sellers, however, will still wish to be employed in the same industry after the sale or have the freedom to some day open another similar business. Such sellers will need to negotiate the non-compete agreement so that their interests and freedom to do business after the closing are protected.

Keys to Negotiate Narrower Non-Compete Agreements for Sellers

  • Sellers should try to limit the geographic scope of the non-compete agreement.
  • Arguments can usually be made that a distance of five or ten miles from a retail-oriented business such as a salon or restaurant is sufficiently broad so that it will not interfere with the buyer’s business.
  • Customers like to stay in a tight geographic distance, so this argument usually has merit.
  • 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.
  • After all, a buyer should be able to stand on their two feet after a few years and properly compete in the marketplace.

Family Members of Sellers in Non-Compete Agreements

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 may want protection in the non-compete agreement from those individuals as well.  Normally this is understood and agreed upon since the buyer has a legitimate interest to protect themselves from anyone related to the seller.

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 a non-compete agreement. 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 agreement in order to protect themselves from this possibility.

Address Non-Compete Issue As Early As Possible

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!

The non-compete agreement serves a valuable purpose in protecting the buyer from future competition from the seller after the sale. It is critical for both parties to understand each other on this particular issue as early in the sales process as possible.

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