What Are The Non-Compete Terms In The Deal?
Business deals contain a variety of clauses to protect both the buyer and the seller—confidentiality agreements, non-disparagement clauses, and more.
Among the most important protections offered in a business deal are the non-compete terms—you don’t want to be in competition with the person to whom you just sold your business, and they don’t want to be in competition with you.
In this post, we’re going to explore some of the most common facets of both non-compete clauses within a business deal. There’s a lot of information to cover, so let’s get started!
Non-Compete Terms
Non-compete terms bar the seller from competing with the buyer. That’s a pretty broad definition, and the terms within the non-compete clause narrow down the ways in which the seller is barred from competing with the buyer and for how long.
What Non-Competition Means
You might assume that non-compete clauses simply mean you can’t open a business that competes with the business you’ve sold. The reality is a lot more complicated.
Non-compete terms typically include clauses that forbid the seller from participating in a competing business in any meaningful way, including as an employee, shareholder, investor, or lender. They may also forbid the seller from participating in any business competitive with the company they sold the buyer.
Here’s an example of how tricky these terms can get: Imagine you’ve sold a widget manufacturing company in Vancouver to a buyer. Within the non-compete timeframe, you decide to open up a business that sells supplies to widget manufacturers.
You might be considered to be in violation of your non-compete clause, as you’re now invested in the success of other widget manufacturers. On the other hand, if the widget manufacturing business you sold didn’t manufacture widgets, you may not be considered to be in violation of your non-compete clause. You should review these clauses carefully with your legal team, especially before starting another business.
Time and Place
Non-compete agreements contain a specified period of time in which the seller is barred from competing with the buyer (often a term of 5 or 10 years). They’ll also feature geographic restrictions such as province-wide or worldwide.
This means you might be barred from competing with the buyer for 10 years, but only in British Columbia. You may instead be barred from competing with them anywhere in Canada. The duration and location of a non-compete generally vary depending on how large and diverse the market of the business being sold is.
Conclusion
Non-compete agreements can be quite broad and can prohibit the seller from engaging in all kinds of different industries related to the company that was sold.
These agreements make sense—the seller has trade secrets and knowledge of intellectual property that could have a significant impact on the buyer’s business interests. A non-compete agreement can protect the buyer and give them the safety they need to actually purchase the seller’s business.
When signing a non-compete agreement, it’s essential to understand exactly what you’ll be prohibited from doing. That’s why you should consult with your business broker and your legal team before signing and consult with your legal team before starting a business or considering job offers that may violate the terms of your agreement.
Looking for a business broker you can contact today to help you understand a non-compete agreement? Call Jason Brice.