Non-Compete Clauses

One of the most important types of contract is a non-compete contract. However, many times business owners do not consider getting this type of contract or do not understand how to use it properly.

A non-compete contract or clause to a contract should be considered in three major situations: (1) when buying or selling a business; (2) when hiring a person who will have primary contact with your clients; and (3) in a shareholders agreement or the operating agreement for a limited liability company.

In the first situation, a business owner is buying a business. The purchase of the business generally involves a client list and the good well generated by the business over the years. Assume that a restaurant is being purchased: "Tony's Famous." The purchaser is not merely buying the lease, and fixtures, he is buying the name and customers who frequent the restaurant. Without a non-compete clause, the seller can open a new restaurant in close proximity to the old restaurant. The end result is that the new restaurant will take the customers. This is not a far-fetched example and in fact happens quite often. Typically, the seller is seeking to get out of his lease to get another space. If he can sell his business, the buyer will assume the lease, thus freeing the seller to move to a new location. A non-compete clause eliminates this problem for the buyer.

The second example is very typical. In service or sales businesses, the employees, not the owners have the most contact with the clients. The result is that the employee starts to view the business' clients as his own. The employee may seek a new job and offers to a prospective employer the client list. Or the employee may seek to strike out on his own with the client list. By drafting very clear and specific employment contracts the employer can protect himself. In fact, with a well drafted employment contract the business owner may be able to get an injunction against the former employee if he tries to breach the contract.

In the third example, the business needs to protect itself from a current and former members or shareholders. Assume that Widgets LLC has three members. One of the members using information received from the business sets up a competing company. Without a non-compete clause, this rogue member might be allowed to compete with the company. However, with a non-compete clause, he would be stated. And, the business might get an injunction to prevent him from competing.

At Port and Sava, we understand the important of non-compete contracts and clauses to your business. We are skilled at drafting such documents to protect your business.