A Noncom petition Agreement — Business Purchase and Sale (also known as a Non-Compete or Non-Compete Clause) is a legally binding contract between a business buyer and seller that restricts the seller from competing with the buyer’s business in the same geographic area and within the same industry after the sale of the business has been completed. The agreement outlines the specific activities that the seller is prohibited from engaging in, such as using the seller’s former customers, employees, or proprietary information to compete against the buyer’s business. There are two primary types of Noncom petition Agreement — Business Purchase and Sale: an unconditional noncom petition agreement and a conditional noncom petition agreement. An unconditional noncom petition agreement prevents the seller from competing with the buyer’s business in any way, regardless of the circumstances, while a conditional noncom petition agreement allows the seller to compete in certain circumstances, such as if the buyer fails to pay the purchase price or if the seller is unable to find other employment.
Noncompetition Agreement - Business purchase and sale
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FAQ
Typically, the only way to fight a non-compete agreement is to go to court. If you are an employee (or former employee) who signed such an agreement, this means you must violate the agreement and wait to be sued. It may be that your former employer has never sued another employee to enforce the non-compete agreement.
The noncompete agreement typically prohibits the seller from working in or being otherwise affiliated with businesses in the same or similar industries as the business being sold. If the agreement prohibits the seller from working in other, unrelated industries, it is likely to be considered unenforceable.
Thus, the non-compete agreements you negotiate with your employees and/or independent contractors will survive a sale or merger and the company acquiring your business will be able to enforce the terms and conditions of those agreements.
A noncompete agreement involving the sale of a business typically provides that, in exchange for a specified payment (which may be part of the sales price), the seller will promise not to go into a similar type of business within a certain geographic area for a specified period of time.
In certain circumstances, it is possible to find non-compete contract loopholes that may void the contract. For example, if you can prove that you never signed the contract, or if you can prove the contract is against the public interest, you may be able to void the agreement.
In general, in a business acquisition, a seller will be taxed at ordinary income tax rates to the extent of the purchase price allocated to a non-compete agreement or provision. Because ordinary income tax rates are almost double long-term capital gain tax rates, sellers often want to minimize this treatment.
Non-Compete Unaffected if Company Maintains Existence If the acquisition is a stock purchase and the acquired company (we'll call it Company B) maintains a separate existence, the non-compete is unaffected.