Noncompetition Agreements in Business Transactions

Unlike the employer-employee situation, a business merger or acquisition is likely to involve the sale of assets which includes the goodwill of the business. Noncompetition agreements entered into as part of a sale of a business are designed to protect this goodwill from the sellers or the owners of the acquired company.

Since the seller receives consideration as part of the sale, agreements not to compete entered into as part these arms-length transactions are more likely to be enforced than those in the standard employment context. Courts also recognize it is more likely that there will be equal bargaining power between the parties to a sale transaction, and that the seller is often paid a premium for agreeing not to compete with the purchaser.

Courts also are more inclined to enforce longer temporal restrictions in noncompetes negotiated as part of a business transaction. Where the sale of a business specifically includes goodwill, courts have found that enforcement of the terms of the agreement are necessary to ensure that “the buyer receives that which he purchased.”

Many states also have statutes which specifically provide for broader enforcement of noncompetes negotiated in a sale of business context.  For instance, California, which prohibits the use of noncompetes in the ordinary employment context, allows them when the individual is selling the assets of his/her business. Cal. Bus. & Prof. Code §16601.

If the seller of the business is going to continue employment with the purchaser, then the purchaser may want to consider using two forms of noncompete provisions: one in the sale agreement and one in an employment agreement. This allows the purchaser to obtain the benefit of the more enforceable sale-of-business noncompete provision, while still requiring noncompete obligations from the employee once the sale-of-business provisions expire.

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