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Non-Compete Agreements in the Sale of a Business
The process of buying or selling a business is long and requires attention to detail (see our previous article entitled Using a Letter of Intent to Reduce Risk in the Process of Purchasing a Business). One aspect of the final sales agreement is, or at least almost always should be, the non-compete agreement. This is an agreement between the seller and the buyer in which the seller agrees not to compete with the new owner of the business within certain parameters. It is easy to see why a buyer should be sure to have this agreement in place before signing on the dotted line and consummating a large purchase. The buyer must make sure that the seller does not open up shop with the same product or service next door shortly after the transaction. This article will address what courts look at when considering whether or not a non-compete agreement is valid and enforceable. After all, a non-compete agreement that is ultimately found invalid could cost more than not having one at all.
When determining whether to find a non-compete agreement enforceable, a court looks at whether the limitations placed on the seller after the transaction are “reasonable”. Courts to balance the interest of the buyer of a business in protecting his business with the right of the seller to make a living. In Arizona, when deciding if a limitation is reasonable, the court will look most heavily at two limitations that are placed on the seller: the geographical area and the time period.
It is vital to ensure that your non-compete agreement is enforceable. Do not leave it to chance. The best practice is to have an attorney draft the agreement after you have explained what you are trying to accomplish. At the very least, have an attorney review your non-compete agreement to ensure that you will have the best chance to have it found enforceable if challenged in court.
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