Business for sale: non-compete

May 2, 2010

Your business is for sale and you are planning your next adventure.  What is reasonable for a buyer to expect you to not do?

In a boilerplate offer I have, the text reads

“COVENANT NOT TO COMPETE. Seller hereby agrees not to engage in any business or activity anywhere in the United States, directly or indirectly, as an owner, employee, consultant, or otherwise, which competes with Purchaser’s operation of the Business for a period of ____ ( __) years following closing. If the time period or geographic area or both of this restriction is declared by a court or an arbitrator to exceed the maximum time period or geographic area which is reasonable and enforceable, then the time period or geographic area or both shall be deemed to become and shall thereafter be the maximum time period or geographic area which is reasonable and enforceable. This restriction may be specifically enforced in the event of a breach or anticipated breach by Seller.”

Of course a seller might protest this as they pretty much can’t do anything anywhere.  But is it unreasonable?  Perhaps not in some circumstances.  If it is a national company or a company poised to become national, it makes sense.  In fact, if the company was poised to go internationally, the limit of the United States may be too narrow.

For me there needs to be a reasonableness test for each deal.

Recently a unique jewelry store was sold in Santa Fe.  The former owner is one of the vendors, supplying some of the jewelry.  Is this business for sale different than the ice cream shop in the same town?  It could be as the former owner may want to sell her items wholesale to others after the sale of the store.  It was resolved by allowing the jeweler to sell wholesale anywhere her line of jewelry but she gave exclusive rights to the buyers of the store in Santa Fe.  For me, this meets the reasonableness test.

There is more to read on this topic at:  http://library.findlaw.com/1999/Jul/1/126606.html

What creative non-competes have you seen?

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