Typical Non-Compete

November 25, 2020

by a searcher from Columbia University - Columbia Business School in Princeton, NJ, USA

I am in the process of finalizing LOI and the owner asked how long is the non-compete. Is there a general rule of thumb for the length of time? Is it a red flag the owner asked? He is in his early 50s. The current terms are that the owner has a 12 month transition period with a non compete thereafter. Any guidance is much appreciated. Deal is $1.5M

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Reply by a searcher
from Southern Methodist University in Houston, TX, USA

I would be concerned if you are buying a business where the owner can re-enter and steal clients with basic anonymity. Non-competes for sales of businesses are typically more enforceable than employee restrictive covenants, the enforceability will need to be drafted by someone familiar with the entirety of the facts and applicable laws. Go for the statutory max in the LOI and then have an attorney advise you as to what is likely to be enforceable. That being said, think about how you would enforce the CNC should you start to lose clients. Are you in a position to figure out where your business has gone and would you be able to prove it was the Seller? Is there a customer concentration an issue? In the end, you may have to make a character judgment here because enforcing a CNC can be difficult.

Reply by a searcher
from London Metropolitan University in Kuala Lumpur, Federal Territory of Kuala Lumpur, Malaysia

Usually 2 years but you better be prepared for competition after that especially when some customers would work with the seller due to relationship reasons. He might even have your key employees join his new company. In addition, if the seller knows the industry inside out versus a newbie like you, he could drop the prices of his products or service in his new company and bleed you dry which may result in you giving up and selling the company back to him at a massive loss. I have seen this happen to my investment. Fortunately I had a put option on the new owner/ buyer and was able to exit with no loss in my capital.

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