When selling your business, you will often notice that the buyer wants to include a “Non-Competition Agreement”.

What is a Non-Competition Agreement?

Typically, a non-competition agreement is included as one of the provisions in the purchase of a business. The buyer will want to ensure that the seller cannot set up a new shop and directly compete with the sold business. To do this, the buyer will contract with the seller to limit the seller’s ability to establish a similar business or work in a similar industry.

Are Non-Competition Agreements Enforceable?

This will depend on a number of factors and each agreement needs to be considered in its specific context. However, the court will typically only hold non-competition agreements enforceable if they are reasonable and not overly restrictive in considering both parties’ interests.

What makes a Non-Competition “Reasonable”?

To determine what is considered reasonable, the primary factors to consider are duration, geographic area, and relevancy of the restriction to the former business.

In some cases, courts will not enforce a non-competition agreement if it implements restrictions that are too large in scope and limits businesses that otherwise would not be in direct competition. Meaning, a non-competition agreement that restricts the seller from engaging in more business practices or business areas than are relevant to the buyer’s business will likely be unenforceable. Further, nor will the court enforce a non-competition agreement if it is overly restrictive in either duration or location.

The court will seek to balance the interests of the buyer, with the ability of the seller to earn an income with their specific business knowledge and skillset. Therefore, it is important for both buyers and sellers when negotiating the terms of a business transaction to consider what may be considered a “reasonable” non-competition agreement. As with all business transactions, we recommend engaging a lawyer to assist in the drafting of non-competition agreements.

Author: Bennett Liddycoat 

This information is general in nature only. You should consult a lawyer before acting on any of this information. This information should not be considered as legal advice. To learn more about your legal needs, please contact our office at (250)448-2637 or any of our lawyers practicing in the area of wills and estates at the following:

Bennett Liddycoat: bennett@touchstone.law