06 May Navigating Non-Competition Agreements in Business Sales

When it comes to selling your business, one common requirement from the buyer is the inclusion of a “Non-Competition Agreement.” But what exactly does this agreement entail, and how can you ensure it’s fair for both parties involved?

Understanding Non-Competition Agreements

A Non-Competition Agreement is a standard component in business purchase transactions. Its primary purpose is to prevent the seller from launching a new enterprise that directly competes with the business they’ve just sold. This agreement is a legally binding contract that restricts the seller from entering a similar business or working within a closely related industry.

The Enforceability of Non-Competition Agreements

The enforceability of Non-Competition Agreements depends on various factors and requires a case-specific evaluation. In general, such agreements will only be upheld by the court if they are deemed reasonable and fair, taking into account the interests of both parties.

Determining “Reasonableness”

To ascertain the reasonableness of a Non-Competition Agreement, three key factors come into play: the duration, geographic scope, and the relevance of the restrictions to the former business.

In some instances, courts may decline to enforce a Non-Competition Agreement if it imposes excessively broad restrictions that extend beyond the protection of the buyer’s business interests. For instance, if the agreement unnecessarily restricts the seller from engaging in business practices or areas unrelated to the buyer’s business, it is likely to be deemed unenforceable. Similarly, courts may be hesitant to uphold an agreement if it is overly restrictive in terms of its duration or geographic reach.

Ultimately, the court seeks to strike a balance between the buyer’s interest in safeguarding their investment and the seller’s right to earn a living based on their unique business knowledge and skills. Therefore, it is crucial for both buyers and sellers to carefully negotiate the terms of a Non-Competition Agreement, with a keen eye on what constitutes “reasonable.” In all business transactions, it is highly advisable to engage legal counsel to assist in crafting these agreements.

If you’d like more information, reach out to us at Sitka Law Group for a free initial consultation. Victoria Lawyers, Sitka Law Group is conveniently located on Shelbourne Street near the intersection of the borders of Victoria, Oak Bay and Saanich.