Business Sale Non-Competition Agreements

John is a small business owner. His company manufactures parts for high-definition television sets. He has worked hard to grow his business. One of John’s competitors approaches him, and offers a substantial amount of money for the company. After a lot of soul-searching, John decides to accept the offer.

Fast forward several months later. John has just gotten back from a long vacation with his family. Dissatisfied with retired life, he decides he wants to get back into the business. John consults a business lawyer about perhaps working as a consultant for one of his old competitors. His lawyer says he can go no further, pursuant to the non-compete agreement he signed before selling his business.

When an employer makes a substantial investment in an employee, that business will seek to protect its legitimate business interests by having that individual sign a non-compete agreement, or covenant not to compete. The employee is prohibited from working in a certain field, in a certain geographic area, for a certain period of time. The same reasoning applies when one business purchases another.

While it may seem antithetical to the spirit of capitalism to some, courts have given broad effect to the protection of “legitimate business interest,” when embodied in business sale agreements. As with “employee” non-competition agreements, restrictive covenants for business sales, (regardless as to whether the business sale is an asset sale or a stock sale) must be reasonable in terms of time and geographic area

The geographic limitation of an agreement addresses the area geographic area in which the seller may not employ job-related skills in a business that is substantially similar to or competitive with the original company. For example, the franchise owner who sells his restaurant and has agreed to a limit of a 50 mile radius, willl be prohibited from opening a new restaurant within that area, but could, for instance, open a video rental franchise.

The duration of the non-compete agreement is also important. An individual who sells a business may only employ job-related skills that would compete with a previous business after a set period of time. For example, a developer who sells his online dating service company could start up an online stock trading company a month later, but could only work for one of his old competitors after the time period in the sale agreement elapses.

Historically, Massachusetts courts are more likely to enforce non-compete agreements in business sale disputes versus employee-employer disputes. Because the parties are more likely dealing with one another at “arms length” and often with the assistance of competent business attorneys, the Massachusetts Courts do not apply a “strict scrutiny” standard, but will typically enforce any reasonable provisions. Accordingly, while in an employer-employee non-compete, a three year term may be too long to be enforceable, in the business sale relationship, the same restriction may be enforceable for five years.

The business lawyers of Parker Scheer work with clients to structure non-compete agreements that protect the valuable assets and information that change hands in the sale of a business. Parker Scheer’s litigation team also works with clients in resolving disputes surrounding non-compete agreements. For more information, contact us via telephone or email. We will be happy to assist you.

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For more information on Massachusetts business law or if you are seeking an business lawyer for any other needs, please contact Barry Scheer. If you prefer, you can also telephone our offices in Boston seven days a week at toll free 866-414-0400.

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