Non-competition agreements: Leverage When Buying or Selling a Business
The premise of a non-compete in the sale/purchase of a business is simple: to protect the business's existing customer base and the accumulated goodwill of a business. No buyer wants to invest in a business where the seller poaches clients and employees or enters back into competition after profiting from a sale. While instituted mainly as a buyer protection, a non-compete can be a great value-adding item for the seller of a business too.
Non-competes should be somewhat narrowly defined by both time and geographic area, and the parties should take care to ensure that the non-compete language is tailored to their specific circumstances. But herein lies some leveraging power of both buyer and seller. If a buyer has done proper due diligence, he or she should have a good idea what range, duration, and criteria the non-compete should cover. Sellers can increase the value of goodwill in their business by evidencing the strength and reach of their customer base, their great employees, and the reputation and brand identity they have worked so hard to achieve. The greater the time or geographic area a non-compete agreement covers, the greater the amount of goodwill the seller can seek to negotiate. A savvy seller with a post-business plan may agree to a broad non-compete in a contract that includes a greater amount of personal goodwill, potentially saving on taxes while adding value to the business.
This is an area of your agreement that should not be overlooked. Though designed to protect buyers, a non-compete can benefit the seller. Your business attorney can work with an accounting professional to help you maximize your leveraging power.