COVENANTS NOT TO COMPETE

Often times, when a business is sold the buyer attempts to prevent the seller from re-entering the same business in the same community. Since the buyer is paying the seller not only for the tangible goods of his business, but also for the goodwill he should be permitted to capitalize upon that purchase to the greatest extent possible. However, in California, "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."

Yet, if the seller agrees that he will refrain from entering the same business in the same community for a reasonable period of time and within a reasonable geographic area, the contract clause will probably be upheld. But, of course, what is "reasonable." The courts have interpreted and re-interpreted "reasonableness" on a case by case basis.

Again, a well-drafted contract which considers previous court decisions and statutory exceptions on the matter may be upheld. There are three statutory exceptions to the prohibition on restraint: a.] a shareholder who sells or otherwise disposes of all of his shares in the corporation/or one who sells the goodwill of a business such as a sole proprietorship; b.] the sale of partnership interests; and c.] a member who sells his interest in a limited liability company.