Business Law 101 / Non-compete/Non-solicitation/Non-disclosure Agreements
By Albert L. Kelley, Esq.
When drafting an Asset Sale Agreement or a Business Purchase Agreement, after you know exactly what assets are being bought, the price that will be paid and whether the lease is assignable, there are just a few other considerations which really need to be considered. The first is whether to include a Non-compete/Non-solicitation/Non-disclosure Agreement. This should be considered whenever a business is purchased. Many times, Buyers will only ask for a non-compete clause, but that is only one-third of the equation. You also need the Nonsoliciation and Nondisclosure as well. What are these?
Let’s start with the Non-Compete Agreement. This is just what it sounds like. An agreement by the Seller that after the business is sold, the Seller will not open another business within a certain area for a certain period of time that operates in competition with the Buyer’s business. Look at it this way. In any successful business, the owner of the business gets known by his customers and if allowed to open a competing business, many of those customers may switch to his new shop. This would damage the value of the business that was purchased.
These agreements are considered restraint of trade agreements and therefore are not favored by the court. They need to be drafted as carefully and as succinctly as possible, or the Court may refuse to honor them. Basically, they have to be narrowly drawn so as to only limit the Seller to the amount needed to protect the value of the purchase. To do this, the agreement must be reasonable in time, space and scope. In other words, the Agreement cannot prevent the Seller from opening any business, anywhere; forever. The scope of the Agreement must be limited to those businesses that compete with the business being sold; must limit the location to the businesses market area; and must not be excessive in time. What is excessive? It depends on the purpose of the Agreement. A noncompete agreement with an ex-employee is deemed unreasonable if it exceeds one year. A noncompete with a franchissee or licensee will be deemed unreasonable after three years. But for the purchase of a business, the noncompete can last up to five years before being deemed unreasonable. If the agreement exceeds five years, it will likely be denied by the Court, allowing the Seller to immediately compete with the Buyer.
A noncompete agreement is important, but as mentioned above, it is only one-third of the equation. Related to the Non-compete agreement is a Non-solicitation agreement. This agreement states that not only will the Seller not compete with the Buyer, they also will not try to convince any of the customers of the business, or any of the employees of the business, to move to another company. If the Seller has been successful (and sometimes even if they haven’t), they have often built a level of respect from their customers and employees. If the Seller tries to convince them to take their business to a competitor, it will undermine the business that the Buyer purchased. It is also a breach of the duty of good faith that arises in every transaction.
Finally, and often the most important is a non-disclosure agreement. In almost every business there are trade secrets; those little buts of know-how that distinguish one business from another. These include things such as your customer and supplier lists, recipes, business expansion plans, franchise plans, building layout designs, employee job descriptions, etc. These are valuable assets that make up a large part of the asset purchase agreement. The last thing a Buyer wants is for the Seller to start telling everyone how the business was run after the sale is complete. The Buyer clearly does not want his competitors knowing all his business secrets the day after the sale occurs.
In every business purchase agreement, the inclusion of these items need to be carefully considered. If a Seller refuses to agree to the terms of a noncompete/nonsolicitation/nondisclosure agreement, it sends a red flag up that the Seller has other plans in mind that could greatly reduce the value of the business.
Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University. He is also the author of “Basics of Business Law” “Basics of Florida’s Small Claims Court” and “Basics of Florida’s Landlord-Tenant Law” (Absolutely Amazing e-Books). This article is being offered as a public service and is not intended to provide specific legal advice. If you have any questions about legal issues, you should confer with a licensed Florida attorney.