According to the Small Business Administration, non-compete obligations can also come into play when you sell your business, especially if you plan to stay in the same industry. These agreements protect the new business owner from opening a similar business for a certain period of time, usually in the same geographical area. When a new business is purchased, the inclusion of a non-compete obligation can mean the difference between a successful business and a failed business. It can also help SBA lenders protect the loan guarantee in the event of a company`s bankruptcy. Therefore, the creditor and its borrower should carefully consider whether the terms of a non-compete obligation are appropriate and sufficient for their transaction. For more information on non-compete obligations, please contact Katie at KOBrien@StarfieldSmith.com or (215) 542-7070. A non-compete obligation often prevents a seller of a company from competing in a specific geographical area. For example, an agreement may stipulate that the seller cannot do business with the type of product or service within 50 miles of the Phoenix city limits. Or it can ban this activity in Arizona or west of the Mississippi River.

If the agreement is challenged in court, the court will decide whether this restriction is appropriate. So what is reasonable? Is it unreasonable for the ban to extend to an entire state or half of the country? The answer, as usual, is “it depends.” It is unlikely that a company that does virtually no business outside of Phoenix will be able to enforce an agreement prohibiting competition in Tucson. On the other hand, part of the company`s valuation was its planned expansion in Tucson the following year. In this case, such a restriction may be appropriate. Good practice is to look at a proposed geographical restriction and list the reasons why the buyer has an interest in that particular restriction. Listing this interest in the agreement may assist the court in determining that the parties have agreed that such an interest is appropriate. Often, the type of industry determines the appropriate geographic scope of the restriction. For example, if a borrower buys a local dental practice, a few miles may be enough for a non-compete clause. However, if a borrower buys a manufacturing company that distributes products in many states, a larger geographic area should be included in the non-compete obligation. Laws regarding non-compete obligations vary considerably from state to state, but many courts use an “adequacy test” to determine whether a non-compete obligation is enforceable. The agreement must be reasonable in relation to the following: If a buyer is buying the goodwill of an existing business, negotiating an enforceable obligation not to compete with the seller can be extremely important to the success of the buyer`s new business.

In addition, negligent practices could jeopardize the execution of the lender`s loan to the buyer. While a buyer should seek advice from their lawyer and accountant, it is also important for lenders to analyze and determine whether the terms of the non-compete obligation are sufficient for each specific transaction. Another element that lenders should take into account is the duration of the non-compete obligation. States differ considerably in what they consider to be a reasonable period of time for the enforceability of a non-compete obligation. While agreements with a term of more than five years are often perceived as exaggerated, the nature of business law and the state will help guide you. When in doubt, expert advice can help the parties achieve appropriate results. In summary, the terms of any non-compete obligation should be appropriate for each transaction. The process of buying or selling a business is long and requires attention to detail (see our previous article titled Using a Letter of Intent to Mitigate Risk when Buying a Business). One aspect of the final sales contract is, or at least should almost always be, the non-compete obligation, this is a serious matter and in most cases the intervention of a specialist in commercial transaction law is necessary.

This is an agreement between the seller and the buyer in which the seller agrees not to compete with the new owner of the company in certain parameters. It`s easy to see why a buyer should be sure to have this agreement before signing on the dotted line and completing a big purchase. The buyer must ensure that the seller does not open a business with the same product or service next door shortly after the transaction. This article discusses what courts consider when assessing whether a non-compete obligation is valid and enforceable. After all, a non-compete clause that is ultimately deemed invalid could cost more than not having one at all. Some common elements of a non-compete obligation that should be taken into account are the type of industry, geographical scope and duration. Often, the nature of the industry and the geographic scope of the non-compete obligation must be assessed together. For example, if a borrower buys a local dental practice, a radius of a few kilometers from the new location may be sufficient for a non-compete clause. However, if the dental practice is located in a rural area, a broader geographic restriction may be appropriate. If a borrower buys a manufacturing company that distributes products in many states, a wider geographical exclusion zone should be included in the non-compete obligation. Courts in some states take a very strict approach to reviewing non-compete obligations, while courts in other states go so far as to review parts of the non-compete obligation to make the agreement enforceable. Courts in states such as Arkansas, Nebraska and Wisconsin rule that a non-compete obligation is unenforceable if part of the agreement is deemed too broad or inappropriate.

On the contrary, courts in other states such as Colorado, Pennsylvania, and North Carolina follow the “blue pencil doctrine,” which allows courts to strike down or revise parts of the agreement that are too broad or inappropriate to make the scope of the agreement narrow enough to be enforceable. The second important factor that Arizona courts traditionally consider is the length of time the seller of the business is excluded from a particular competitive activity. Often, the non-compete obligation prevents the seller from carrying out a certain activity in a geographical area (see above) for a certain period, such as one year or five years, etc. .