Non-Compete Agreements Can Add to Your Purchase Price

Commentary: In her previous posting on this Blog, Lisa Miller, Esq. previously articulated a number of the legal issues to consider in connection with the execution of a non-compete agreement in selling a business. From the Seller’s point of view, it is also important to consider how agreeing to a non-compete can increase the value of his business.

Offering a non-compete in connection with the sale of a business can be very enticing to a potential buyer, adding value to the potential purchase price. A buyer is obviously interested in the business that has been established, and arguably the buyer’s interest reflects a respect for the clientele and services that are associated with that business. In a way, having a buyer interested in a business can be construed as a compliment. However, the seller’s ability to build a business and thrive can also be a threat to a potential buyer. A buyer may be less inclined to purchase a business if he knows that the seller can go down the street, recreate his original business model and compete with the new business owner. For this reason, buyers may be more willing to engage in the sale and pay more for a business where this threat has been eliminated.

However, there are a variety of factors for the seller to keep in mind when making this determination. If it were not for this agreement, would he have planned to engage in business that is now restricted? If so, is the purchase price, or the added consideration in addition to the base price, enough to warrant him giving up that opportunity?

As always, it is strongly recommended that a seller consult with an attorney prior to entering into a non-compete to be sure that the written agreement properly reflects the deal that he believes he made. A non-compete arrangement will often have very specific parameters — if they are not outlined to match the deal made, the seller could be agreeing to more than he originally bargained for.

Comments/Questions: ljm@gdnlaw.com

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