Selling Your Business? You May Need to Negotiate a Non-Compete Agreement
by Caron_Beesley, Community Moderator
- Created: September 12, 2012, 4:15 am
Non-compete agreements are commonplace in the workplace, particularly in specialist industries. However, their enforceability varies from state-to-state. California, for example, prohibits them entirely.
But non-competes can also come into play when you sell your business, particularly if you have plans to stay in the same industry. These agreements protect the new business owner against you opening a similar business for a certain amount of time, usually in the same geographic area.
So what’s a serial entrepreneur to do? If you have a passion for your business and plan to stay in the same industry but your buyer insists on a non-compete, what are your options?
Earlier this year, Entrepreneur magazine offered the following tips to business owners who want to move laterally within their own industry, without being constrained or even sued because of a rigid non-compete agreement.
As with the sale of any business, it comes down to negotiation and being clear about what you want while respecting the needs of your buyer:
1. Start by Consulting an Attorney
As mentioned above, each state has its own laws when it comes to non-competes. Even where they are permitted, enforceability of the terms of a non-compete by courts can vary. So, talk to a lawyer to understand how your state’s courts have ruled in past non-compete cases. A lawyer can also help you understand how your industry or situation may impact any agreement, as well as negotiations.
2. Be Specific About What You Want
As with any negotiation, find out what the other party wants so you know what you are dealing with. Respect their position (this can help lead to synergies), but use the negotiation process to outline the exceptions that you have to the terms they propose. For example, try to limit the non-compete to very specific types of business, work or industries that will not limit your future business plans. Try to come to an agreement and form contractual language around the very specific things that you should not be doing in any new venture. Also consider limiting the time period (usually to no more than five years) and geography as much as you can so your options are wider.
Keeping the language specific will help you understand your parameters, as well as protect the buyer, because courts tend to view broad contractual language as invalid.
3. Consider a Non-Solicitation Agreement Instead
Depending on state law and how non-competes fare in your state, it might be more beneficial to both parties to put in place a non-solicitation agreement. This prevents you from hiring former employees or approaching the current customers of your business once you sell. Alternatively, you might want to limit the non-solicitation to specific products. For example, if you sold IT security software to an enterprise customer, you would be restricted from going back in and selling that product to that customer. However, there would be nothing to stop you from branching out and selling IT storage solutions to that customer instead.
4. Explore an Earn-Out
Instead of signing a non-compete, consider an earn-out. This is a provision that states that the seller will receive additional future compensation from the buyer based on the business achieving certain financial goals. This gives the buyer an insurance policy that the seller won’t compete directly against them or undercut the business they’ve left behind.
The Bottom Line
Start with your lawyer. All the options described above should only be pursued based on a solid understanding of state law, court rulings and the risks you are willing to take as a business owner.
Related SBA Resources
- Getting Out – Tips for being smart about how you exit your business.
- 6 Tips for More Seamless and Fruitful Business Negotiations
- Buy-Sell Agreements: Does My Business Really Need One?
- 4 Ways to Exit your Business Gracefully
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