Friday, April 22, 2011

Restricting Competition Following A Business Sale

A Purchaser of an existing business must not overlook the need to restrict the selling parties from competing with the newly acquired business after the sale. Because the seller has access to all existing contacts and customers of the business (as well as knowledge of the business’ trade secrets, methods and know-how), the seller poses a true competitive threat to the business after the sale. To diminish the threat of such competition, a covenant not to compete must be included in the terms of the sale. A covenant not to compete will restrict the seller from engaging in business practices that are competitive to the buyer’s newly acquired business. It is important that the seller, all of its owners and key employees execute a non-compete agreement.

Drafting an enforceable covenant not to compete is no easy task. In Virginia, courts will enforce a covenant not to compete only if it is: (a) narrowly drawn to protect the business interests of the protected party, (b) not unduly burdensome on the restricted parties' ability to earn a living, and (c) not against public policy. Courts will evaluate the covenant not to compete on its own merits on a case by case basis, taking into account the circumstances of the businesses and individuals involved. A covenant will not be enforced if it is deemed by the Court to be too broad in duration, geographic range or restricted activities. Thus, the broad, boilerplate non-compete language found on many standard form buy-sell agreements, may not work.

The attorneys at Gross & Romanick, P.C. have considerable experience drafting non-compete agreements. We know the law, we know the cases, and we know how to protect the buyer’s interests.