How to Negotiate Non-Compete Agreements with Buyers

When selling a construction business, one of the most important—and often complicated—elements to negotiate is the non-compete agreement. A non-compete agreement (NCA) is a legally binding contract that restricts the seller from competing with the buyer in the same business for a specified period, within a certain geographic area, and sometimes under specific conditions. It is designed to protect the buyer’s investment by preventing the seller from using their inside knowledge to directly compete after the sale.

While NCAs are common in business transactions, their terms can vary significantly. For construction business owners, it’s crucial to negotiate an NCA that strikes a balance between protecting the buyer and allowing the seller to maintain reasonable future opportunities. In this blog, we’ll explore why non-compete agreements are important, key terms to consider, and strategies for negotiating a fair agreement.

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1. Why Non-Compete Agreements Matter in Construction Business Sales

When you sell your construction business, the buyer is investing not only in your assets and customer base but also in your knowledge, reputation, and relationships within the industry. To safeguard this investment, they want to prevent you from starting a competing business that could draw customers away or damage the business they’ve just acquired.

For buyers, a non-compete agreement is a crucial part of ensuring that they don’t lose their competitive advantage after the sale. However, for the seller, it can be a restriction that limits future business opportunities, so it’s important to ensure the agreement is reasonable and does not hinder future earnings or ventures unnecessarily.

Also read Dealing with Underperforming Assets When Selling Your Business

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2. Key Terms of a Non-Compete Agreement

Before entering negotiations, it’s important to understand the primary elements of a non-compete agreement. The main factors in a typical NCA include:

Duration

The duration of the non-compete is one of the most important aspects. Buyers generally want a long enough period to secure their market position, but sellers want to ensure they’re not locked out of their industry for too long.

For most businesses, a non-compete clause lasts between one and five years. For construction businesses, a typical non-compete agreement might last 2 to 3 years, depending on the market. Buyers may argue for longer periods if they believe the seller has a strong competitive advantage or if the seller is particularly influential in the industry.

Negotiation Tip:

• Propose a shorter duration if you plan to stay in the industry in some capacity. A reasonable timeframe for the NCA is often tied to the time it would take the buyer to fully integrate your business and establish their market position.

Geographic Scope

The geographic scope defines where the seller is restricted from operating their business. In some cases, a buyer may request a broad, nationwide restriction, while the seller may want to limit it to a more specific region or market where they have significant experience.

Negotiation Tip:

• Ensure the geographic area is limited to where your business operates. For example, if your construction company primarily serves a particular state or city, negotiate for a region-based restriction rather than a nationwide one.
• If the buyer operates in multiple regions, suggest limiting the restriction to the specific area where you directly competed with them.

Scope of Work

The scope of work clause defines which activities the seller is restricted from engaging in. For example, it could prohibit the seller from starting or working for a competing construction company or offering certain types of services within the construction industry. The broader the scope, the more limiting it will be for the seller.

Negotiation Tip:

• Limit the scope of work to specific services that are directly relevant to the buyer’s business. For example, if the buyer is focusing on residential construction, consider negotiating a restriction only for that market, allowing you to continue working in commercial construction or other niches.

Consideration or Compensation

A non-compete agreement should provide compensation to the seller for agreeing to restrict their future business opportunities. In some cases, this might be part of the overall sale price, or it could be negotiated as an additional fee paid to the seller.

Negotiation Tip:

• Request additional compensation for the non-compete agreement, especially if the restrictions are significant. This could include a lump sum payment or additional payments over time.
• Alternatively, ensure the non-compete is incorporated into the sale price, but ensure you are adequately compensated for the future limitations on your business activities.

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3. Strategies for Negotiating a Fair Non-Compete Agreement

Negotiating a fair non-compete agreement requires finding a balance between the buyer’s need for protection and the seller’s desire for future opportunities. Here are some key strategies to help you navigate the negotiation process:

Understand the Buyer’s Needs

The first step in negotiating a non-compete agreement is to understand the buyer’s motivations. What is the buyer trying to protect? In the construction industry, buyers typically want to prevent sellers from using insider knowledge to directly compete in their local market. The buyer may also be concerned about customer relationships, trade secrets, and proprietary processes.

By understanding the buyer’s concerns, you can negotiate terms that address these issues without being overly restrictive.

Evaluate the Impact on Your Future Plans

Before agreeing to a non-compete agreement, consider how the restrictions will impact your future business opportunities. If you plan to start a new business in the same industry, make sure the restrictions do not inhibit your ability to do so. For example, if you intend to work as a consultant or in a different market segment, negotiate to ensure those activities are not prohibited.

Negotiation Tip:

• If you plan to continue working in the construction industry, consider negotiating a more lenient non-compete that allows for consulting or work in a specific niche, such as focusing on a different type of construction (e.g., commercial versus residential).

Consider Post-Sale Involvement

If you want to stay involved with the business after the sale, it may be possible to negotiate a non-compete agreement that allows you to remain active within a limited capacity. This could involve continuing to work with the company as an advisor or in a non-competing role.

Negotiation Tip:

• Propose a limited role that does not conflict with the buyer’s business. For example, you could suggest taking on an advisory or mentoring role that provides value to the buyer without competing.

Incorporate a “Blue Pencil” Clause

Sometimes, the terms of a non-compete agreement can be overly broad or restrictive. In such cases, a “blue pencil” clause may allow for modifications to the agreement if a court finds certain provisions to be too restrictive. This gives you the flexibility to challenge unfair clauses if the agreement is enforced.

Negotiation Tip:

• Ensure the agreement includes a “blue pencil” provision to ensure that overly broad restrictions can be adjusted to meet legal standards.

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4. Final Considerations

Negotiating a non-compete agreement during the sale of your construction business is an essential part of protecting your interests while meeting the buyer’s needs. A well-drafted agreement will help ensure that you receive fair compensation for the restrictions placed on you and that the buyer feels secure in their investment.

Before agreeing to any terms, be sure to carefully evaluate the impact of the non-compete on your future business plans. Work with an experienced attorney to ensure that the agreement is both fair and legally sound.

By approaching the negotiation strategically, you can protect your ability to pursue future business opportunities while satisfying the buyer’s need for protection. This way, both parties can walk away from the transaction with confidence and a clear understanding of their post-sale commitments.