Non-Compete Agreements and Their Impact on Your Business Acquisition
Non-Compete Agreements and Their Impact on Your Business Acquisition
A successful business acquisition involves finding a suitable business, making sure the profits, assets, financials, and operational systems justify the price and settling the deal.
Right?
Not quite.
You also need to consider the impact on your newly acquired business of a key employee or the current owner setting up a competing business or going to work for a competitor.
And don’t think it won’t happen!
A non-compete agreement and its cousin, the restraint of trade clause, will help address this risk.
What is a Non-Compete Agreement?
A non-compete agreement is a legal contract that restricts the seller—or key individuals involved in the business—from competing with the business you just acquired. This can include:
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Starting a new, competing business within a defined geographic area.
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Working for or advising a direct competitor.
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Poaching existing customers, suppliers, or staff.
The terms of a non-compete agreement usually specify the timeframe, the geographic region, and the specific activities that are restricted. A well-crafted agreement must be fair for the seller and provide adequate protection for the buyer.
Why is a Non-Compete Agreement Important?
1. Protecting the Value of the Business:
When you buy a business, much of its value lies in its customer relationships, brand reputation, and intellectual property. If the seller sets up shop next door, they could lure away loyal customers or recreate what made the original business successful.
A non-compete agreement protects these assets and helps you retain the goodwill you paid for.
2. Minimizing Competitive Risk:
The seller knows the details of the business: its customers, pricing, and operational strengths. Without restrictions, they could become a formidable competitor.
Non-compete agreements reduce this risk and give you the breathing room needed to integrate and grow the business.
3. Retaining Key Talent:
Ideally, non-compete clauses will already be written into key employees’ employment contracts to prevent them from leaving and joining a competitor, taking vital knowledge and client relationships with them.
If they aren’t, you must make it a condition of the contract that they are completed before settlement.
Key Considerations When Negotiating a Non-Compete Agreement
Because these are legal documents, I recommend obtaining legal advice in their preparation. Numerous cases have challenged these agreements in court, so getting it wrong can be as expensive as ignoring the issue.
The overriding consideration will be whether restrictions are reasonable and necessary to protect the buyer’s interests. Reviewing the business sale contract is a key part of due diligence.
A non-compete agreement will need to address:
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Scope and Duration:
The agreement should be specific and reasonable. Courts will not enforce overly broad restrictions (e.g., a 10-year worldwide ban). Typical durations are 12–36 months, and restrictions should focus on activities critical to business operations. -
Geographic Boundaries:
Define a geographic scope that makes sense for the business. For example, a local café might warrant restrictions within a single city, while an e-commerce business may require broader protections. -
Key Individuals:
Identify who the non-compete applies to. It may include the seller, key managers, or employees with access to sensitive information.
Final Thoughts
A non-compete agreement is critical for protecting the value of a business you are buying. By setting clear, enforceable terms restricting competitive behaviour, you can safeguard your investment in the business. If you're buying a business you want to ensure you are prepared and minimise any major mistakes.
Work closely with legal professionals to ensure the agreement is fair, reasonable, and legally enforceable. This step will provide the confidence that you’re buying not just the business’s assets but also the opportunity to grow your business without unnecessary competition.
Tags: buying a business acquisitions legal documents hr
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