January 27th, 2021 by FH&P Lawyers

Our Business Law team is experienced; ranging from individuals and small businesses to large multi-jurisdictional corporations. Our lawyers’ knowledge of the realities of operating a business allows us to provide our clients with practical and cost-effective solutions to the ongoing challenges of operating a successful business in today’s competitive and rapidly changing commercial environment.

Associate Dustin Merritt answers a frequently asked question, should a purchaser of a business write a "non-competition agreement" to protect themselves?


Transcript

When purchasing a business should a Non-Competition Agreement be in place?

Our clients often ask us if non-competition agreements should be included as part of a business purchase and sale transaction?

In our view, it is a good idea if you are buying a practice or buying any type of business to insist upon a non-competition agreement be included as part of the documents for that transaction.

You really just need to be careful that you don't put yourself in a position where you bought a business and then the vendor decides he doesn't like you anymore and goes and tries to open a competing business or they get involved with the competing business and starts trying to poach the clients of the business that you have acquired or poach the employees.

To prevent that we generally advised to include a non-competition agreement and insist upon those prohibitions be included. Now you may have heard that non-competition agreements are really difficult to enforce and the courts are hesitant about them so it may not be worthwhile. Often is the case with employees and non-competition agreement so if you have a business and your employee signs a non-competition agreement or has a non-competition clause in an employment contract that is difficult probation to enforce because you are limiting that employee's ability to earn a living so you need to be really careful in that context. There is a separate line of cases and legal doctrine surrounding non-competition agreements in the business purchase and sale contract. Courts generally recognized that part of the value of a business that you are acquiring is tied up in the goodwill and in the client list and in the employees. In order to protect that it's much more likely that a non-competition agreement will be enforced in a business purchase and sale setting. You still need to be very careful with the terms of that non-competition agreement in order to ensure that it's reasonable because for it to be enforceable the terms need to be reasonable. There is plenty of case law on the guidance for what is reasonable but generally up to about two or three years of a time period. Plus the geographic restriction on that non-competition covenant that it is really in tune with the actual area where the business operates so you are not asking for too broad of a geographic restriction or too long of a time period. You will need to make sure that those terms remain reasonable.

All of that might seem a bit complex or a bit confusing and there are a lot of factors to consider with non-competition agreements and we've got the expertise in our firm to address those concerns and to guide you through that process, so please give us a call if you are interested in purchasing a business or interested in a non-competition agreement.

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