NON-COMPETITION COVENANT - Business Purchase Agreement
Business Purchase - Letter of Intent - Due Diligence - Negotiations - Asset vs Share - Purchase Agreement - Closing
Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
A non-competition covenant in a business purchase is a contractual promise made by the seller to the buyer that restricts the seller from engaging in a business that competes with the acquired business for a specified period of time and within a defined geographic area. A non-competition covenant, which is a restrictive covenant, is typically included as a provision in the main purchase agreement or as a separate side agreement.
The non-competition covenant is crucial in a business purchase for the buyer because it primarily serves to protect the value and goodwill of the acquired business, which can be further explained as:
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Protects Business Goodwill: When a buyer purchases a business, a significant part of the value is often the intangible goodwill - the company's reputation, customer loyalty, and market position. If the seller were immediately free to open a competing business nearby, they could draw away customers and employees, effectively undermining the value of what the buyer just paid for. The covenant creates a buffer to allow the buyer to transition and integrate the business without immediate competition from the former owner.
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Safeguards Proprietary Information and Trade Secrets: The seller often has intimate knowledge of the business's operations, client lists, pricing strategies, and trade secrets. A non-compete helps ensure that the seller does not immediately use this confidential information to directly compete with the buyer.
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Ensures Customer and Employee Retention: Customers may have a strong personal relationship with the former owner. The covenant helps prevent the seller from soliciting these customers (and often, key employees) to join a new, competing venture, thus helping the buyer retain the existing client base and workforce.
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Enforceability: Courts generally view non-compete covenants made in connection with the sale of a business more favorably than those in an employment context, recognizing the buyer's legitimate interest in protecting their investment. For the covenant to be legally enforceable, however, it must be considered reasonable in:
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Scope of activity prohibited.
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Geographic territory covered.
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Duration (length of time) of the restriction.
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A well-drafted business purchase agreement is the foundation of a successful acquisition. It should be a robust document that protects the buyer from future surprises and gives them clear remedies if the business is not as it was represented. For knowledgeable and experienced legal representation when purchasing a business, contact corporate business lawyer Christopher Neufeld at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.
