Non-Solicitation & Non-Competition Agreements in a Business Sale Transaction

Sep 13, 2022

Justification for engaging a business broker to sell a company can be distilled into three elements: knowledge, experience, and skill.  At the most basic level, an entrepreneur hires a professional intermediary to sell their business to gain knowledge about the market value of their business, experience creating a robust, confidential marketplace for the sale, and skill negotiating the best available financial terms with potential buyers.

This deliverable by a business broker, although satisfying a basic need, is similar to going to a restaurant and receiving a well-prepared steak as a solo item for a meal with no salad, starch, vegetable, dessert, or beverage.  The sale of a privately held company or family business is a sophisticated, nuanced transaction traditionally incorporating important business, legal, tax, real estate, and finance components, in addition to the basic sale price associated with transferring ownership.

The legal documentation for virtually every business purchase & sale transaction will include non-solicitation and non-competition agreements between the seller and buyer.  A non-solicitation agreement establishes that one party will not implore customers, employees, or vendors to follow them to a new company.  A non-competition agreement conveys that one party will not provide an alternative option for the purchase of products and services.  In simple terms the two agreements seek to create a safe harbor for continued operation of a business without threat from the party that was financially renumerated in the sale.

However, as with all legal documentation the “devil” for these agreements is in their details.  It is highly recommended that both parties in a business purchase & sale transaction have quality legal representation.  It is also strongly suggested that the attorney selected has experience and knowledge in the relevant area of law and the law of the state where the transaction will occur and disputes in the future potentially litigated. Employment of legal counsel addresses the basic need in this situation, however a difference maker related to achieving the best possible outcome in negotiations can often be the business broker on your side of the table.

The reasons a business broker can play a critical role in negotiating non-solicitation and non-competition agreements include the following:

  1. A knowledgeable, experienced business broker will have previously reviewed agreements drafted by other attorneys and be able to provide input based on that business experience on what is standard and typical in the marketplace.
  2. Prior review of dozens to hundreds of similar agreements will allow a business broker to offer potential issue resolving solutions they have witnessed/facilitated that got parties to “YES” in the same legal terrain.
  3. They likely can provide referrals to legal resources when special knowledge or experience is needed.

The following are a handful of the non-solicitation and non-competition agreement legal issues commonly addressed in a business purchase and sale transaction that the parties should be cognizant to get addressed:

  1. Signatories to the Agreements – Sounds like a simple issue, right? How about the situation where a selling business signs the agreement corporately, but the agreement does not extend to individual shareholders. Now what happens if a minority shareholder takes the “secret sauce”, “key employees”, and/or “significant customers” to a new business start-up post sale because no limitations were placed on them personally. Likely not a situation desired by the Buyer.
  2. Term of the Agreement – What is standard? What is reasonable?  What protects the business that was acquired?
  3. Geographic Area of the Agreement – What can be enforced? A general rule of thumb is to put customers on a map and to protect that area.
  4. Penalties for Violation
  5. Employees – Do employees currently have agreements in place? Will they sign agreements with the new owner? What consideration will need to be paid to obtain signatures? What threats do employee migration to competitive companies or in the creation of their own businesses pose to the company?
  6. Indirect Competition – Could the resources of the sale be used to support/create competition for the buyer from family members or employees?

An experienced, knowledgeable, highly skilled business broker is a professional peer to a CPA or lawyer as a transactional advisor.  The best of the best in the industry have the ability to educate, negotiate, and facilitate their clients to positive outcomes.  Non-competition and non-solicitation agreements are small components of most deals in terms of time & energy spent, but they are elements both parties should want to get right when the deal is being finalized or they are issues that can fester and take a emotional, mental, and/or financial toll in trench warfare resolution.

If you have questions about non-solicitation or non-competition agreements in a business sale context or anything else related to the sale or purchase of a business in Washington, Oregon, or Alaska, IBA always welcomes the opportunity to be a resource for the entrepreneurial community.  All conversations with IBA are held in strict confidence.  100% of IBA’s fees are payable upon performance at deal completion.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family-owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.