Buying a Business: How to Keep the Current Owner from Stealing Customers
A non-compete agreement can prevent a former owner for stealing your customers.
When you buy an existing business you might have a touch of anxiety about the former owner starting his new business. While you have the brand name, he or she has a Rolodex full of contacts and existing relationships. Fortunately, there is one easy way to keep the former owner from giving you headaches and causing you sleepless nights -- a non-compete agreement.
Non-Compete Agreement Basics
A non-compete agreement is a contractual clause specifying what competition is, what the current owner cannot do, where he cannot do it and a duration for which he can’t compete. Such clauses are standard legal boilerplate when you purchase a new business. You shouldn’t, however, try and draft it on your own. Leave the contractual specifics to your legal department.
Non-Compete Agreements and State Law
Non-compete agreements are subject to state law. Most states allow them with various restrictions and caveats. Some states, such as California, completely prohibit non-compete agreements, with very few limited exceptions. Non-compete clauses are most common in the entertainment industry, though they can be useful for any business, especially new owners seeking to prevent previous proprietors from starting new and competitive businesses.
California has some exceptions to its blanket ban on non-compete agreements. Keep in mind, however, that even out-of-state NCCs are not enforceable in California. The three things that might make a non-compete clause legal in California include:
- The dissolution of a limited liability corporation.
- The dissolution of a partnership.
- The owner sells his goodwill.
The latter is most important for those purchasing a new business. It means that your lawyers might well be able to draft a non-compete clause that will hold up in court.
Non-compete clauses aren’t the only way to prevent competition. There are other, similar clauses you can insert into your sales contract. Such clauses include:
- Invention Assignment Agreement: This assigns ownership of all inventions to the firm, preventing the previous owner from taking the inventions with him.
- Non-solicitation Agreement: This prevents the signatory from soliciting or accepting business from your customers for the duration of the non-compete agreement.
- Antipiracy Agreement: The former owner of your business cannot solicit or hire your employees.
- Confidentiality or Non-Disclosure Agreement: The former owner cannot disclose any confidential information about the company. These often do not have a time limit and are in effect in perpetuity.
- Garden-Leave Clause: A clause that pays the former business owner for the duration of the non-compete clause. While not an ideal situation for you, this can make or break the former owner’s willingness to sign a non-compete agreement.
Getting a Non-Compete
Getting the business owner to sign a non-compete clause can be difficult. Particularly if you are the more interested party, getting the other guy to sign the clause can be near impossible. Still, if the previous owner is looking to unload his business fast and cheap, getting him to sign such a clause can be easy. Talk to your legal department and don’t be afraid to do a little negotiating to get him to sign. Offering more money or even a garden-leave clause can be worth if you have legitimate reason to worry about competition.