Competition is the backbone of a market-based economy.
Fair competition is supposed to help consumers have more choices and pushes competing businesses to operate more efficiently.
But sometimes it makes sense to limit competition.
When you buy a business from someone the last thing you want is for them to set up shop across the street from you and take your customers away.
Or when you are co-owner of your business with someone else, and the other co-owner is bought out, you don’t want the former co-owner competing with your business.
In most similar situations the seller can be restrained from competing with the business that was sold.
The law, in California for example, allows the parties to agree to restrain the seller from competing.
The main thing to look out for is if the seller is either selling all of their ownership in the business or sells the goodwill of a business.
If you have some form of either situation, a restraint is allowed.
So in many business sales, the seller can be restrained from competing with the business sold.
The restraint must be in an agreement between the buyer and seller. It is not an automatic restraint.
The restraint applies to the entire geographic area where the sold business conducted its business.
Let’s say your business operates in a given county, the seller of that business cannot compete with your business in that same, entire county.
But suppose the business expands to another county, the restraint wouldn’t apply there.
That restraint can last indefinitely as long as the business continues to operate in the original county.
That means the restraint can have no specific ending date and it is valid.
But the agreement must provide that a time limitation is tied to however long the business sold continues to operate its business.
Once the sold business stops to operate, the seller can then compete because the business no longer conducts business.
If the seller opens a different type of business in the original county where the business sold operated, that is allowed even if there is a restraint. The different business just does not compete.
These non-competition restraints can be used for nearly all types of businesses, including sole proprietorship, partnerships, corporations or limited liability companies.
So if you are buying a business you will want to make sure that part of the deal includes a restraint on the seller from competing with your acquired business.
If you have co-owners, you will want to make sure that you have agreements in place that require non-competition in the event any co-owner is bought out.
References: California Business and Professions Code section 16601.
This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.
This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation. If you need legal advice, consult a qualified attorney.
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