Non-Competition Agreements When Buying a Business

Is it important to have the seller of the business sign a Non-Competition Agreement with the buyer of the business?

It is sometimes important to have the seller of the business sign a Non-Competition Agreement with the buyer of the business. These are sometimes referred to as "covenants not to compete." This is to avoid the situation where you buy a business and the seller opens another competing business down the street or across town (or in the case of an Internet-related business, possibly anywhere in the world). A Non-Competition Agreement is typically a separate agreement, but its form is attached to and referenced within the Purchase Agreement.

What is a covenant not to compete?

In a Non-Competition Agreement, the seller covenants (promises) not to compete directly or indirectly with the buyer in the type of business just purchased.

Geographic Limitation

It is wise to place reasonable geographic limitations in the Non-Competition Agreement, because courts often do not enforce restrictions that they perceive to be unreasonable in scope. What is a reasonable geographic limitation will depend upon the size of the area in which the business is located, and how large the city, county, or state is. What might be considered a reasonable geographic limitation in Rhode Island might not be reasonable in California. Essentially, the geographical limitation in a Non-Competition Agreement cannot be stated to unreasonably limit the seller's ability to earn a living, and how this will be determined will vary from state to state. You need to talk to a good lawyer on this point.

Time limitation

It is also wise to place a time limit in the Non-Competition Agreement to make it more likely that a court would find it to be reasonable. Determine whether one year, two years, or five years suits your purposes. And as with geographical limitations, the time limit shouldn't unreasonably limit the seller's right to earning a living. What is a reasonable time limit may also vary from state to state.

Key provisions in a covenant not to compete

Although there is no specific language or terminology that must be included in a Non-Competition Agreement, the following is a list of key provisions to consider:

• State the type of business
  
• Seller's covenant not to compete directly with buyer
  
• Seller's covenant not to compete indirectly with buyer
  
• Reasonable geographic limitation of covenant
  
• Reasonable time limitation of covenant
  
• Rights to injunctions for specific performance of the agreement
  

You must know the legal limits your state imposes in these types of agreements, so consultation with an experienced business attorney is crucial.

Click here to view a sample Non-Competition Agreement.

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