Ten Non-Compete Issues To Consider When Buying A Business

Every day businesses across the country merge and consolidate their operations. If your business acquires or merges with another business, consider these issues when drafting the agreements to make sure that you will get the benefit of your bargain.

Require a non-compete agreement: First and foremost, you'll want to prevent the owners of the acquired business from competing with you by requiring restrictive covenants. Without a restrictive covenant, the former owners can simply set up shop and compete with you immediately after selling you their company. In drafting the restrictive covenants, consider not only what type of restrictions will protect you, but also what the courts will find enforceable. In general, the prevailing test for enforceability in the sale of business context is reasonableness. For example, if the business operated nationwide, then courts will be more likely to find that a nationwide provision prohibiting competition is reasonable. However, if the company operated in a more limited area, then it may be unreasonable to demand a nationwide restriction and you may want to be more circumspect in the extent of the restriction. Either way, it is advisable to include language in the agreement indicating that the company operated in a certain geographic area and that the seller acknowledges that a restriction covering that area is reasonable and necessary. Be specific: When drafting the noncompete portion of the deal you should carefully define the prohibited activity. Consider how the seller could hurt your business in the future and make sure that you draft the noncompete agreement to prevent activities that would enable the seller to resume activities that would harm the company. This is normally done by delineating prohibited activities, which should include the seller not only acting as an employee in a competing business but also being affiliated with, controlling or having an interest in any competing business. Address key employees: Are any of the principals of the business you're buying going to continue on as employees? If so then you will want to have two different agreements: one for the sale of the business and an employment agreement for key individuals. Make sure that the provisions in these agreements begin to run from the right dates. The purchase agreement should include restrictive covenants that begin to run from the closing date and the restrictions in the employment agreement should begin to run from...