The Benefits of Having Enforceable Covenants Against Competition When Purchasing a Business

Aug 23, 2013

To better highlight the objectives of this article, I will use the model of an example.  Accordingly, let’s assume that we have a family with experience in the restaurant business, the members of which decide to buy an existing Turkish eatery located in Toms River, New Jersey, the only such restaurant within a 10 mile radius.

Buying a business is one of the most important decisions anyone can make. The price for a well-established business is often significant. In addition, the buyer of the business most likely intends to operate the business for a long term.  Thus, just about all the purchaser’s resources and efforts, both financial and non-financial, are usually sunk in this major investment.

Purchasing a business requires many considerations, including price, location, method of payment, correct evaluation of the goods purchased, as well as careful thought to all consequences of the transaction, such as taxes, fees, operating costs, loss of other streams of income, opportunities or other jobs.

The family in our example model thoughtfully considered all these issues and ultimately decided to go through with the purchase of the restaurant.  Soon after closing, the buyers stepped into their new promising business with enthusiasm, energy and optimism. Their restaurant sports a well equipped kitchen, has a new generous lease with favorable terms, and even retained the name of the former restaurant, a well recognized and well marketed name which over time ensured a significant and loyal clientele for the business.

Yet, disaster lurks “around the corner”.   In our example, to the buyers’ shock, the former owner of the restaurant immediately after closing just opened a brand new Turkish restaurant, two streets away from his old restaurant.   Within the next two weeks or so, the former customers of the business who learned that the original owner opened a new place, all abandon the old location in favor of the new one.  The recently purchased business rapidly loses value and is now in imminent danger of shutting down.

These circumstances illustrate the need for a contractual clause in the Purchase Agreement that should have prohibited the seller from competing in any way with the business he just sold.  Such clauses typically include the following type of specific provisions:

 

Non-Compete Agreement.

  • Neither Seller nor any of its principals shall, directly or indirectly, individually or through any third party(ies), open, operate, work for, own, became a shareholder or member in, become an employee, franchisee, owner, affiliate, officer, director or consultant of, any business in any way related to the restaurant business.  These restrictions shall continue for the next five (5) years from the date of the closing throughout the area encompassing a ten mile complete radius from 123 Main Street, Toms River, New Jersey.

 

  • For five (5) years after closing, neither Seller nor any of its principals shall, directly or indirectly, individually or through any third party(ies) contact, solicit, or do any business with any part time and/or full time employee(s) who worked for the business at any time in the last three (3)  years.  

 

  • The parties agree that the duration and geographical scope of this non-competition agreement is reasonable and fair and may be specifically enforced, as a vital component of Purchaser’s rights in the business purchased herein.  Seller’s violation of this Non-Compete agreement shall entitle Purchaser to all remedies provided under New Jersey law, including but not limited to injunctive relief without bond, and all reasonable attorney’s fees incurred by the Purchaser in connection with any Court action to enforce this agreement. 

 

The law in most U.S. jurisdictions provides that such prohibitions (usually falling under the generic label of a “Covenant Not To Compete”) are legal as long as they are reasonable with respect to the designated geographical limitations, duration, and scope.

The benefits of a solid non-compete agreement cannot be understated.  This can be the difference between financial disaster and business prosperity.

 

By: Robert S. Popescu, Esq.

Popescu Law Group

2501 Highway 516

Old Bridge, New Jersey

www.popesculawgroup.com

 

This and all other articles published by the firm do not constitute legal advice upon which the reader should rely.  The matters addressed are general and informational only.  Legal advice may only be offered to an actual client of the firm, following consultation and analysis of his/her specific circumstances.  The laws vary significantly from jurisdiction to jurisdiction and some or all of the concepts addressed above may have no relevance or applicability in your state.  A lawyer-client relationship may only be formed by formal consultation and engagement of the firm.