Most business sale transactions have what are known as post-sale restrictions following the sale. In a nutshell‚ the post-sale restriction will limit the seller’s activities following the sale in order to protect the assets that the purchaser just purchased. Most non-competes should have a limited geographic scope and a time limitation. In addition to limiting those two factors (which is pretty self explanatory) careful review and adjustment to the language of the restrictions is important when it comes to avoiding violation of the terms of the restrictions. Here are 5 things to look at relating to your non-compete:
- Same Business Already Existing – you may have other locations where you currently offer similar goods or services to that of the business you are selling. For example‚ if you sell one of your five gas stations and a non-compete exists‚ you have to be sure that the other locations are not within your non-compete territory. If there is a chance that there will be an existing conflict‚ that specific business should be specifically excluded from the non-compete restrictions.
- Defining “Similar Business” – the term “similar business” should not be left open for interpretation‚ which leads to litigation. Defining what constitutes a “similar business” is essential to avoiding unnecessary litigation following the closing. People have differing ideas of what a “similar business” is. Agree to its definition in the agreement and it will no longer be subject to interpretation.
- Who is Excluded From Competing – in many instances‚ the non-compete will state that you (as a seller) will not be able to compete and be involved in a similar business. What about your family members? Some buyers will specifically want to exclude your family members from competing against them as well. What if your son opened up a similar business within the territory? There are certain situations where this will be warranted (for example‚ if your son was involved with the business begin sold) but in most scenarios‚ it would not be. However‚ you should pay careful attention to the language of the non-compete so that you do not include others in your non-compete and limit their ability to earn a living. Although there is a question as to whether you would have the ability to bind anyone else to this non-compete‚ why take any chances. As a seller‚ the non-compete should be limited to you only.
- Involvement in the Business – a section of the non-compete clause will address the type of involvement that you are able to have in a competing business. Most non-compete clauses state that you will not be able to have any involvement in a competing business‚ meaning‚ that you cannot own any interest in‚ be employed in‚ consult with or have any indirect relationship in a competing business. This is something that you would have to analyze and think over before signing the agreement. Look out for any minority interests you may have in other businesses.
- Keeping Your Options Open – although today you decide that you want to retire and move‚ you really never know what tomorrow will bring. Even if you plan on retiring or going into a different business altogether‚ you never know what opportunities will come your way or what may force you back into the workforce. Regardless of what you think today‚ you must limit these restrictions to the fullest extent possible. This includes the time and geographic reach of the non-compete‚ as well as the above items. I know too many business owners that are looking to get involved with something two weeks into “retirement”.
Like any other restrictions in life‚ you want to make sure the post-sale restrictions you are agreeing to fit your life‚ not necessarily the deal. For more information on post-sale restrictions and other valuable information on selling your business‚ you can click on “Our Publications” below and order a copy of ENDWISE the guide to selling your business with peace of mind.