When purchasing a business, it may be important to the buyer that the seller not compete with the buyer in any fashion for a set period of time and within a set area after the transaction has completed. It is wise for the buyer and seller to discuss this issue at the outset, and then let the lawyers determine the legal framework for what is called the “restrictive covenant”. The buyer will always want the most expansive area and the longest period of time. The seller may not care if the seller has no interest in competing, but the seller may care if the seller is considering a new business venture which may relate in some way to the business being sold.
The law on restrictive covenants continues to evolve as parties take these agreements to court when one party allegedly breaches the agreement. Courts are interpreting these documents more strictly, so the parties must be cautious in their approach. If the parties agree to a term or a restricted area that the law has determined to be too broad or too long, a court may very likely void those key clauses within the agreement, making it essentially unenforceable. This could be devastating to a buyer if the seller sold it’s goodwill and suddenly opens a competing business, thereby likely taking much of the value from the sold business.
Courts do not like to enforce restrictions that, in their opinion, provide overly broad protections for buyers or that result in too restrictive of an area or term enforced on sellers. Generally speaking, the courts have determined that restrictive covenants should be for no more than 2 years and for an area that can reasonably be considered the immediate competing area for the business. These key items should always be addressed in any buy/sell agreement. Additional items for discussion could include non-solicitation clauses for employees, contractors, suppliers or clients of the business.