Templates and Checklists


Non-Competition Agreement



by Richard Nacht, Esq.

A Non-Competition Agreement is a contract between a seller and a buyer who are in discussions about or are drafting an agreement for the sale. The purpose of the Agreement is to restrict the Seller from entering into a business which will compete with the Buyer after the sale, for some period of time thus protecting the buyer’s post-closing interests.

The rationale for a Buyer is simple and one which seems very reasonable. "Why should I, the Buyer, allow the Seller, who is likely qualified, has the proper contacts and connections based on his history, knows everything about my product (which was his product) enter into a business which will compete with me". It’s hard to come up with an affirmative answer to that question.

Nevertheless, in recent years, courts have started to reign in non-compete clauses that they consider overbroad or too restrictive on someone’s right to earn a living. It is worth noting that noncompete agreements between buyers and sellers may generally have broader restrictions than those between an employer and employee, as court will likely see buyers and sellers on a more equal footing than an employer and employee where the decision-making power could be more tilted toward the employer.

Nevertheless, courts will look to see that the non-competition agreement has been drafted to specifically meet the requirements for enforceability under the specific circumstances the Seller and Buyer find themselves.

The key provisions of a non-compete agreement (for business sale) are:

  • Reasonableness of the length of the noncompete period.
  • Reasonableness of the territorial geographic restrictions.
  • Enforceability; legitimate business interest of the buyer vs. seller’s ability to earn a living.

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Business Non-Compete  Agreement Template

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NON-COMPETITION, NON-SOLICITATION AGREEMENT

This Non-Competition, Non-Solicitation Agreement ("Agreement"), is effective this ______ day of ________, 20___, by and between ________________, a _________________ with offices at _______________________ ("Company") and _______________________, an individual, with an address of ________________________("Owner") and ___________________, an ________________ with an address of _______________________________________ ("Buyer"), together the "Parties".

WHEREAS: Seller is selling Company to Buyer,

WHEREAS: Buyer is purchasing Company from Seller,

NOW THEREFORE: In consideration for the foregoing the Parties hereby covenant and agree as follows:

1. NON-COMPETITION

For a period of two (2) years from the Closing Date, the Seller may not directly or indirectly, engage, own, manage, control, operate, be employed by, participate in, or be connected with the ownership, management, operation, or control of a business substantially similar to the type of business conducted by the Company, anywhere in the United States. If the Seller breaches or threatens to breach this section, Buyer and/or Company will be entitled to a preliminary restraining order and injunction preventing the Seller from violating its provisions. Nothing in this Agreement prohibits the Buyer from pursuing any other available remedies for a breach or threatened breach, including the recovery of damages from the Seller.

2. NON-SOLICITATION

For a period of two (2) years from the Closing Date, the Seller may not:

2.1 Canvas or solicit the business of (or procure or assist in the canvassing or soliciting of) any client, customer, or employee of the Company for the purposes of competing with the Company;

2.2 Accept (or procure the acceptance of) business from a client, customer, or employee of the Company for purposes of competing with the Company. However, the Company may consent to this competition in writing; or

2.3 Otherwise contact, approach, or solicit (or procure the contacting, approaching, or soliciting of) an entity known to the Seller because of his association with the in a way that could be detrimental to the Company.

3. GOVERNING LAW, JURISDICTION

This Agreement shall in all respects be construed in accordance with and governed by the laws of the State of ___________________, County of _____________. Any suit involving any dispute or matter arising under this Agreement may only be brought in the courts of the aforementioned jurisdiction. Both Parties hereby consent to the exercise of personal jurisdiction by any such court with respect to any such proceeding related to this Agreement. Any controversy, claim, suit, injury or damage arising from or in any way related to this Agreement shall be settled by binding arbitration in accordance with the commercial arbitration rules of the American Arbitration Association then in effect and before a single arbitrator chosen by Company. Any such controversy, claim, suit, injury or damage shall be arbitrated on an individual basis and shall not be consolidated in any arbitration with any controversy, claim, suit, injury or damage of any other party. Company may seek any interim or preliminary relief from a court of competent jurisdiction in the aforementioned jurisdiction necessary to protect its rights pending the completion of arbitration. Each party shall assume its own costs of arbitration.

4. MISCELLANEOUS

a) Entire Agreement; Modification. This Agreement sets forth the entire agreement and understanding of the Parties hereto concerning the subject matter hereof, and, except as otherwise specifically provided below, supersedes all prior and contemporaneous correspondence, agreements, arrangements and understandings, both oral and written, between the parties hereto concerning the subject matter hereof. No modification hereof shall be binding upon the parties hereto except by written instrument duly executed by such parties or their duly authorized representatives.

b) Invalidity of Particular Provisions. If any term or provision of this Agreement or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the other terms of this Agreement, or the application of such terms or provisions to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and be enforced to the fullest extent permitted by law.

c) Counterparts. This Agreement may be executed in any number of counterparts, including electronically, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

d) This Agreement may be delivered by email, and email copies of executed signature pages shall be binding as originals.

e) Interpretation. The paragraph headings of this Agreement are inserted for convenience only and shall not constitute a part of this Agreement in construing or interpreting any provision hereof. Whenever the context requires, words used in the singular shall be construed to include the plural and vice versa, and pronouns of any gender shall be deemed to include and designate the masculine, feminine or neuter gender.

f) Notices. All notices given under this Agreement must be in writing. A notice is effective upon receipt and shall be sent via one of the following methods: delivery in person, overnight courier service, certified or registered mail, postage prepaid, return receipt requested, or by any other means agreed to by the Parties, such as email.

g) This Agreement will become effective when all parties have signed it. The date this Agreement is signed by the last party to sign it (as indicated by the date associated with that party’s signature) will be deemed the Execution Date of this Agreement.

h) Each party shall use all reasonable efforts to take, or cause to be taken, all actions necessary or desirable to consummate and make effective the transactions this Agreement contemplates or to evidence or carry out the intent and purposes of this Agreement.

EACH PARTY REPRESENTS AND WARRANTS that it has authority to enter into this Agreement and lawfully make the disclosures contemplated hereunder.

IN WITNESS WHEREOF, the parties have executed this Agreement on the dates indicated below.

COMPANY

Signature: ____________________________________

Date: _______________________

By: _________________________________ (Name)

It’s _________________________________ (Title)


SELLER

Signature: ____________________________________

Date: ________________________

By: _________________________________ (Name)

It’s _________________________________ (Title)


BUYER

Signature: ____________________________________

Date: _________________________

By: _________________________________ (Name)

It’s _________________________________ (Title)


Comments

by Richard Nacht, Esq.

There are several critical issues a business owner needs to be aware of when working with a Non-Competition Agreement. The overriding viewpoint is to focus on the terms of the Agreement being fair and reasonable to both parties. The terms must be drawn so that they protect a legitimate business interest and at the same time do not prevent the Seller’s ability to earn and living. These can be difficult to reconcile; however, if either is considered too restrictive or too broad, most courts will refuse to enforce the Agreement.

A typical time frame, and one likely to be acceptable to any reviewing court for the non-compete period, is one to two years.

The geographical restriction is a complicated clause to properly write up. The typical approach, certainly until the advent of the internet for commercial purposes, was one based on distance from the Company location. A reasonable geographic restriction could have been fifty (50) miles from the Company location, or some number of miles surrounding the market to which the Seller had been selling. In today’s business environment, it’s not beyond the realm of possibility that an entire country restriction could be justified by circumstances.

The current day analysis should take into account a review of the particular targeted market, the territory in which the Seller was working, and the extent of the private company knowledge held by the Seller. The geographical limits of non-compete covenants are often viewed as enforceable so long as they are in alignment with the Seller’s business service area in which the Seller served and which he may have as a result an unfair advantage.

In the event your Non-Competition Agreement does ever reach a court; the Courts rarely simply throw out an Agreement if the terms are too broad – the more common approach allowed to the courts is to modify covenants and terms that they consider unreasonable. Examples include:

  • Changing a length of time from five years to one year.
  • Change 100 miles to 50 miles.
  • Change "in U.S.A." to "New York State".

Courts also consider the effect the non-competition agreement is likely to have on other persons, such as customers and other beneficiaries of a business. If the public have alternative sources to obtain the goods or services provided by the seller, then, for example, North Carolina courts will be more likely to enforce non-competition restrictions imposed on the seller. However, if a court finds that the elimination of the seller’s competition would be detrimental to the public interest, it will be less likely to enforce the agreement, even if otherwise reasonable.



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