Get a Non-Compete Clause When You Buy a Business
There are many things you need to consider when you’re buying a business.
Does the field the business is in match your skillset? Does your particular set of skills lend itself to helping the business grow?
Is the business profitable, or is there at least a clear path to profitability? Do the overall financials look good? What is the reputation of the business now, and how can you improve it even more?
Through the due diligence phase of buying a business, you’ll be able to investigate these questions in more detail. This phase will help you ensure that you are prepared for your new purchase and protected from situations that didn’t come to light in early negotiations.
As you are working to close the purchase of your new business, one thing you should insist upon is the contract includes a non-compete clause. Such a section in the purchase agreement will prevent the seller — under certain situations — from simply opening a new business and competing with you.
A non-compete clause is essential to have as part of the business sale. It’ll help ensure that the seller is helping you succeed in the future, or at least not standing in your way of success, rather than actively preventing it.
Here are some tips for how to approach a non-compete clause.
A non-compete clause should be as specific as possible. It should include the specific types of business activities that are covered.
If you’re purchasing a restaurant, for example, the non-compete clause should specifically detail whether you’re purchasing the recipes. If so, it should individually list all the recipes and where they can be found.
If you’re purchasing a business that has patents or trademarks, are you purchasing them as well? That will be important to lay out in detail.
You can potentially prevent the seller from using their name or initials if it’s closely associated with the business name. This will be important to avoid confusion if the seller decides to set up a new business and use their name or initials — even if it won’t compete with your business.
The non-compete clause should set the geographic area that it covers. While it may not be necessary to prevent the seller from working in or opening a business across the entire United States, it is probably important to prohibit that in your geographic region.
Finally, ensure the non-compete clause includes language that prevents the seller from working or consulting for one of your competitors. In essence, you want the seller to exit the industry altogether when they sell the business to you.
Check the Legality
While there are certain parts of a business deal that you could complete on your own, it may be a good idea to hire a lawyer to assist you with others. The contract phase, in general, is where a lawyer can really prove their value to you.
In regard to non-compete clauses, it’s especially important that the details meet the standards of legality. Each state has different requirements for what you can and can’t include in a non-compete clause.
What states’ rules need to be included in consideration may depend on where the business’ headquarters and locations are, and also what states it does business in.
Some states stipulate that non-compete clauses have to be limited to a geographic area of a certain square mileage. Some require them to be limited to a few years. Some require them to cover only one or two narrow industries.
If your non-compete clause doesn’t meet legal requirements, there’s no way you’ll be able to enforce it — even if you and the seller sign it at closing.
While you never want to assume the seller is going to breach the contract, your non-compete clause should include specific details of the actions you’ll take if it does happen.
First, the clause should detail the fines and damages the seller will be responsible for if they breach the contract, including your legal fees. The penalties should be large enough to deter the seller from breaching the contract, without being so onerous that it wouldn’t stand up in court.
Second, the clause should detail how any breaches will be adjudicated. Will it be through court proceedings or binding arbitration? Where will that process take place.
Third, include a section in the non-compete clause that allows you to discuss the details of it with competitors in your area so they’re deterred from hiring the seller.
Stick to It
Some sellers may balk at including a non-compete clause in the contract. They may not want to be restricted from future work. They may try to assure you that they have no intention of competing with you in the future.
This is one of those times when you need to stick your ground and not give in. If a non-compete clause isn’t in writing, it isn’t enforceable.
Explain to the seller that you aren’t looking to punish them for selling their business, but rather simply protect yourself in the future. It’s not personal; it’s business.
If the seller refuses to sign the non-compete clause, you should seriously consider what their future intentions are. If they are hesitant to sign a non-compete, do they want to leave open the possibility of competing with you in the future?
Maybe, maybe not. But, you don’t want to take the chance.
In many cases, the lack of a non-compete clause should be a deal-breaker for you. Without it, you don’t have any protection from having the person who sold you their business put you out of business with a new company they started.
Contact Sunbelt South Florida broker today for all your business buying or selling needs!
Sunbelt Business Brokers of West Palm Beach provides dedicated business brokerage services for all of your selling needs. Whether you are an established business owner nearing retirement and looking to sell, or an ambitious entrepreneur seeking your next investment opportunity, there is no reason to look beyond Sunbelt Business Brokers. Visit us at 800 Village Square Crossing
Suite 216 Palm Beach Gardens, FL 33410 or contact us at (561) 832-9222.