Can one buy a California business with a non-compete obligation?
Los Angeles, CA |
I heard non-compete clauses are illegal in CA. If a party wishes to purchase a shop from a sole proprietor, would it still be possible to include at least a limited noncompete clause to not open another shop in the same town?
Yes. The California rule against noncompetition agreements has an exception for the sale of a business. The agreement must still be reasonable in place and time; the same town is probably a reasonable place.
I would have a lawyer review the noncompetition agreement as well as every other aspect of the sale.
I agree with Mr. Eschen and would extend on his point to say that if you are purchasing a business you should have an attorney involved for more than just this particular issue. There are a lot a hidden traps involved in the purchasing of an on-going business. Even taking over a small, inconspicuous business might be walking into a mountain of headaches that the previous own has failed to address (i.e., zoning, taxes, licensing, on-going vendor contracts, etc.). If you are willing to spend money to purchase a business, spend the money to do it right. If you don't it might cost you much more in the future. Good luck.
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My colleagues are correct that non-competes are legal in connection with the sale of a business so that the limitations on time and geography are reasonable (e.g. not the whole world and forever). Having a lawyer and CPA involved in this transaction may cost "a dollar" today but will save you "ten dollars" in the years to come. Good luck with the venture.
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My colleagues' answers are somewhat correct but somewhat misleading.
If the seller were the owner of a legal entity (partnership, LLC or corporation), I would agree with their answers, which refer to the sale of a business. However, you expressly stated that the seller is a sole proprietor. In that situation, the non-compete provision is enforceable only if the individual sells "the goodwill of a business" (please see the post at the link below, which includes a link to the applicable statute).
Accordingly, it is especially important, if you are contemplating such a transaction, that you have a lawyer prepare, and an accountant review, the purchase-and-sale agreement to ensure that it expressly and appropriately identifies and values the goodwill being sold.
This information does not constitute legal advice and does not establish an attorney-client relationship.
It is possible to buy a business in California that includes a non-compete clause, but the non-complete clause must be narrow and the restrictions must be related to protecting the goodwill of the business. I strongly suggest that you contact a lawyer to help you with this language. It is easy to get this language wrong and then your non-compete will be useless.