Sellers must exercise caution in several areas when negotiating the sale of a business. For example, buyers often want to prevent the seller from setting up a competing business to lure away customers or clients. Typically this means signing a noncompetition agreement or a nonsolicitation agreement.
Watch Out for Noncompetition & Nonsolicitation Agreements
A noncompetition agreement prevents the seller from working in the same industry for a period of time, and within a defined geographic area. A nonsolicitation agreement doesn’t prevent the seller from working in the same field, but prevents him or her from doing business with company clients, customers, and sometimes vendors or suppliers for a specified period of time. In addition, nonsolicitation agreements often prevent the departing seller from recruiting employees or contractors to leave the business.
Remember Personal Guarantees
Another area of potential risk involves personal guarantees signed by the seller on behalf of the business. For example, if a business is sold midway through a commercial lease and the lease is guaranteed by the seller personally, the landlord may not be willing to release the seller until the lease expires. Sellers need to make sure that the buyer is legally obligated (and financially able) to step up.
Protect Intellectual Property
Yet another area of concern involves the need to protect intellectual property and trade secrets during and after the negotiation of a business sale. Often businesses use nondisclosure agreements during the pre-sale activities, including a buyer’s due diligence. Buyers may insist that seller’s maintain confidentiality of sensitive business information after the sale has been consummated. And savvy business owners place confidentiality and nondisclosure provisions in employment and independent contractor agreements to prevent their valuable information from ending up in the wrong hands.
We’ll address each of these risks in more detail over the next few postings.