One of the many issues that arise during the sale of a business is the request for reassurance from the buyer that the seller will not go open a competing business after the sale is completed. While this seems simple enough, what happens if the seller is a small IT company where the seller is also an employee of the business? Alternatively, what happens if the buyer wants the seller’s other employees to stay on and also sign non-compete agreements? Then things get a little more complicated.
Regardless of the situation, Arizona judges apply the same standard when determining if a non-compete agreement is enforceable in Arizona. Therefore, an Arizona non-compete agreement is enforced:
- When it has a legitimate business purpose
- When they have a limited time duration
- When they have a reasonable restricted area
- When it is narrowly focused on the individuals previous job duties
As to the first and most important point, Arizona judges find that non-compete agreements against a seller when accompanying the sale of a business are more enforceable since they protect a clear legitimate interest of the buyer, namely that the seller will not go start a competing business to the one they just sold to the buyer. See i.e. Valley Med Specs v. Farber when a business is sold, the value of that business’s goodwill usually figures significantly into the purchase price. The buyer, therefore, deserves some protection from competition from the former owner. See Kafker, supra, 31 AM. BUS. L.J. at 33.
A restraint accompanying the sale of a business is necessary for the buyer to get the full goodwill value for which it has paid. Blake, supra, 73 HARV. L. REV. at 647. See also Shufieldt v. NextCare Inc. restricting a doctor and founder of an urgent care from developing delivery or managing a competing business after the sale of the urgent care was found enforceable.
Because of this, non-compete agreements are much more likely to be enforced against a seller when accompanying the sale of a business than in instances where the non-compete is just against an individual employee. In instances where a buying company wants to create enforceable non-compete agreements with the seller’s employees, then refer back to the page Arizona Non-Compete Agreements page.
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If you have questions about how to structure non-compete agreements when buying or selling a business or you would like to set up a strategy session with an attorney, then Counxel Legal Firm would love to help. Contact us at (480) 744-6621 or at request@counxel.com. Don’t forget to check out the good things that others are saying about the services they received from Timothy Coons on Google.
This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact request@counxel.com or (480) 744-6621 to request specific information for your situation.
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