Definition - What does Non-Competition Agreement mean?
A non-competition agreement is typically signed by the seller's key employees for the protection of the buyer. It stipulates that the seller cannot engage in direct or indirect competition with the buyer during a specified term. Competition is usually defined as starting another business, having an investment in, consulting, or providing advice to an individual or company that is in a similar business. Non-competition agreements usually have a defined term of five to seven years, and encompass a specified geography allowing the seller to still engage in a similar business as long as it is outside the buyer's area.
Divestopedia explains Non-Competition Agreement
Non-competition agreements can be very restrictive, but they are necessary for buyers since they depend on the seller to assist their business, rather than compete. Often, buyers will issue restricted stock as purchase price consideration, which is tied into the non-competition agreement.
Some key clauses that are usually included in non-competition agreements include the non-solicitation of customers and/or employees. Not soliciting customers is at the very heart of the non-competition agreement. The seller is usually prohibited to discuss, solicit or engage current customers for potential new business. Similarly, the seller cannot engage current employees for the purpose of starting another business.
The violation of a non-competition agreement is usually followed by legal action from the buyer. The claim is usually a quantification of the business loss suffered from the seller circumventing the agreement and directly competing. Non-competition agreements that are too restrictive in terms of geographic coverage or time frame may be scaled back by the legal courts.