NON-SOLICITATION 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-solicitation covenant in a business purchase agreement is a contractual provision designed to protect the value and goodwill of the acquired business by restricting the seller's post-closing activities, with this particular restrictive convenant constraining the seller from actively recruiting or pursuing:
-
Customers/Clients of the business they just sold.
-
Employees of the business they just sold.
-
Sometimes vendors or suppliers as well.
These restrictions are usually for a specified period of time and may be limited by a geographic area or restricted to only those customers and employees the seller had direct contact with.
The non-solicitation covenant is extremely important to the buyer because it protects the core value of the business acquisition (its goodwill). The purchase price of a business typically includes a significant amount for goodwill - the value of the company's reputation, loyal customer base, and skilled team. If the seller were free to immediately reach out to their old clients or employees, they could essentially undermine the sale and take that goodwill back, drastically devaluing the business for the buyer. The non-solicitation convenant thus:
-
Protects Customer Base: It prevents the former owner (who has established relationships) from immediately diverting customers to a new competing venture. This ensures the buyer has a reasonable period to transition client relationships and solidify loyalty.
-
Retains Key Employees: It stops the seller from poaching crucial staff. A mass exodus of key employees or sales talent could severely cripple the acquired business, making the investment worthless.
-
Secures the Value Paid: It helps ensure that the buyer receives the full value of the business they paid for, particularly the intangible asset of goodwill. Without it, the seller could be perceived as "selling the business and then immediately trying to steal it back."
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.
