What do I need to know about non-compete agreements in the purchase or sale of a business?
Over the past few years there has been an explosion in demand for non-compete agreements, and a corresponding demand for legal advice on getting around overly restrictive agreements.
Non-compete agreements are contracts that are designed to prevent a previous employee or business owner from working for a competitor or starting a new business that will compete with the business they are leaving or selling. Non-compete agreements used to be relatively rare, often applying only to those at the very highest levels of a company or employees that had had access to sensitive information. However, in the past few years they have become very common, in fact, Jimmy Johns was in the news recently for making its sandwich makers sign non-competes.
Despite their popularity, some states, most notably our neighbor, California, will not enforce non-compete agreements. The courts in other states remain skeptical of non-compete agreements. In order to be enforceable, the agreement must be limited in scope - both geographically and time-wise; and be designed to protect a legitimist business interest.
For example, an agreement that barred a baker from opening a competing bakery in the same town within one year of selling his or her bakery to another baker would probably be enforceable. But an agreement that prevented the baker from opening a bakery anywhere in the state for the next five years would probably not be enforceable.
If you are considering selling or buying a business, non-compete agreements are definitely something you should be thinking about. From the buyer’s perspective, it gives you breathing room to establish the business as your own without worrying that the previous owner, who knows the market and has the skill-set for success in that area, will come back in (or sell their knowledge to someone else) and take away your customers. From the seller’s perspective, you want to make sure you are free to move on with your life without being condemned to the unemployment line.
When structuring a non-compete agreement, or looking for ways to challenge one already in place we consider several factors:
• What geographic area is covered? Does the agreement cover similar businesses across the street? In the same city? Within 50 miles? Within the same state? The larger the area the agreement covers, the less likely a court is to enforce it.
• How long does the non-compete agreement last? How long will it take for the new owner to establish the business as his or her own? How quickly will the knowledge/reputational advantage the former employee or previous owner fade?The shorter period of time the contract covers the better in the eyes of most courts.
• Does the business legitimately need protection? Is there a special product, process, or method of doing business that sets this particular business apart from its competitors? Is there proprietary information involved?
• Would an agreement leave former employees and/or the previous owner unemployable? The courts will generally not enforce contracts that totally deprive people of their ability to earn a living.
Las Vegas business law attorney Craig Stone has the knowledge, skills, and experience necessary to balance all of these competing interests and craft a non-compete agreement that works for all parties involved. Call (877)905-0890 today to schedule a free consultation.