We often hear buyers inquire about the protections offered by a non-compete agreement. The issue that concerns them, of course, is "what prevents the buyer from going out and starting the same business across the street from me?" And it is a good point: in many small businesses, the vast majority of value is not in assets, but rather in intangibles such as the customers, location, etc.

There are a number of constructs that can help you protect your interests in the business you are buying, but they all center around a well structured non-compete agreement.

Issues to Address in a Non-Compete:
Geographic Reach of Non-Compete. To be effective, a non-compete agreement should address the geographic reach it is to encompass. For many small business transactions, a range of 100 miles is sufficient. For single-branch retail operations, an even smaller range might be appropriate- perhaps as little as 25 miles. For companies that have a wider territory, the exclusion might be the entire country.

Industry Restrictions. It is not reasonable to restrict an individual from working in the future. As such, a typical non-compete will prevent a seller from working in the same industry for a length of time. Again, the actual period will be dependent on the situation. Bear in mind that there will always be exceptions. For instance, when a seller owns a portfolio of 15 gas stations and is only selling off 1 property, it would not be reasonable to restrict him from owning the other 14.

Length of Time. The non-compete should always include a time period. The most typical length of time is in the 2-5 year range. Again, seek to tailor this to the specific situation.

Is it Enforceable?
Another question often asked is "is a non-compete agreement enforceable?" Many people believe that a non-compete carries no value and can never be enforced. This is likely due to the perception in the employment world in which it is hard to restrict an employee's right to earn a living in the future.

For a business transaction, it is largely held that the non-compete is more enforceable. This stems from the fact that there is no employee-employer relationship between the buyer and seller. The seller is entering into the transaction through their own volition, removing any sense of coercion from the scenario.

Other Factors to Protect Your Business:
While a non-compete agreement is central to protecting your new business from incursions from the seller, there are other factors at work. Key among them is the seller either holding a note or structuring an earn-out. If the seller has a vested interest in the performance of the business, it is far less likely that they will do anything to harm your business.

As always, Clear Rock does not give legal advice. Consult your own corporate or personal counsel for advice on your specific circumstances.