The Virtues of No Competition

By Tom Taulli

In a recent transaction, a buyer paid all cash for a business. It was a good deal, as the business was in fine shape and poised for growth. It was, of course, a good deal for the seller, who now had a heftier bank account.

But the seller had another advantage: there were no barriers for him to start an identical business. Since he was relatively young and had sufficient start-up capital, he started a competing business ó which was a nightmare for the buyer.

The solution for the buyer would have been to require the seller to sign a noncompetition agreement. But is this type of agreement illegal? In California, for example, the courts frown on noncompetes. It is good for society to allow people to use their efforts in things they are good at.

Non-Competes are OK

However, there is an exception: noncompete agreements are valid so long as they are part of acquisitions. Basically, in an acquisition, it is assumed that the seller is getting compensation to not compete.

But there are still limitations. A noncompete must be for a limited period of time ó say two to three years. Also, a noncompete may not necessarily be enforceable if it is too broad. After all, there may be related businesses the seller can enter and that would not be a threat to the buyer.

Conclusion

For the buyer, he can treat a noncompete agreement as an asset, which he can expense over time. So, it clearly has tax consequences. That is, it is smart to have a good CPA run the numbers.

And, of course, it is critical to have a skilled attorney draw-up the agreement. The agreements can be quite tricky and may be different from state-to-state.

MergerPlace is pleased to have the esteemed Mr. Tom Taulli as the managing editor of our MergerPlace M & A Advisor™ E-zine.

Tom Taulli is an expert in the M&A process. He is the author of the critically acclaimed The Complete M&A Handbook (Random House) as well as six other books written for publishers such as Bloomberg and McGraw-Hill. Tom also teaches M&A at the USC School of Business.

Tom has been quoted extensively in the press, including the Wall Street Journal, USA Today, Barron's, and The Los Angeles Times, and has provided commentary on CNBC, CNN, and Bloomberg TV, as well as appeared on a variety of top radio stations across the country.

Tom's books are available for purchase in our bookstore.

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