If you feel ready to sell your business — but aren’t ready to retire — you’ll want to pay close attention to the non-compete clauses in the agreement before the deal closes. The non-compete agreement will be part of the buyer’s negotiations and the structure of the purchase price.
In a 10-minute YouTube video, employment and competition lawyer Jonathan Pollard says “Every week my office receives inquiries from folks who have sold their businesses, signed non-compete agreements, and now are evaluating their options.”
Former business owners who want to get back into the same industry regret having signed an overly restrictive non-compete agreement during the sales process.
Entrepreneurs who have led a business for 15 to 20 years often reach a point where they feel burned out. So they sell their business with the vision of taking a couple of years off to do something else, and then get back in — either with another start-up or an established company in the same industry.
They reach a point when they start to go stir crazy, observes Pollard:“They realize that they really didn’t want to sell their business. Instead, they simply wanted to relax and decompress for a year or two.”
Or, the owner who sold the business agrees to work for the buyer’s company. “That marriage goes south in a hurry and doesn’t work out,” says Pollard.
The seller was so accustomed to calling the shots and shaping the culture that they had difficulty working for a bigger enterprise. So they are miserable and scrambling to find ways to get out of the aggressive non-compete agreement they signed as part of the purchase agreement.
Here are three things to consider.
1. Some non-compete agreements go well beyond what is reasonable or enforceable.
Pollard says he has seen some post-merger non-compete agreements stipulate that the seller can’t work for (or start) a competing business anywhere in the world for five years or seven years. This can be a major headache if the seller defaults on full payment of the deal.
It’s true that the enforceability of non-compete agreements varies from state to state. But judges may be less likely to dismiss a non-compete agreement for a millionaire former business owner than for a non-compete agreement that keeps a lower-level employee from earning a living after being laid off.
2. Hire a litigation counsel to vet the asset purchase agreement before you sign it.
“I invariably see these non-compete problems on the back end of a deal. I never see them on the front end,” says Pollard.
Some owners mistakenly assume that the lawyers involved in writing up the transactional details of the agreement will examine the non-compete provisions as well. That’s not always the case. The specialized transaction lawyers who serve as deal counselors are not litigation attorneys, says Pollard. Many have rarely been involved in helping the seller with problems after the sale.
3. Consider offering a discount on the sale price for more favorable terms in the non-compete agreement.
“When you sell your business you want to get your money,” Pollard emphasizes. If you receive a partial upfront payment of $10 million on a $15 million deal and the buyer defaults on the remaining money, you shouldn’t be restricted from re-entering the industry that you know so well.
Some purchase agreements are written so that even if the buyer defaults, the terms of the non-compete agreement still apply.
Selling a business is a very complicated transaction, the stakes are high, and millions of dollars are involved,” says Pollard. “It’s penny-wise and pound-foolish not to have a litigation attorney vet the deal and build in more legal protections for the seller.”
Some business owners think they can get back into the industry and do better than ever before.
“I have seen that scenario dozens of times,” said Pollard.
For More Information
For more good advice about non-compete agreements, follow Jonathan Pollard on LinkedIn or subscribe to his YouTube channel.
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