Legal Question in Business Law in California

As a Franchise Attorney I can tell you the following. It depends on what the contract of sale non compete provides. It also depends on whether the non compete is reasonable in time and geographic scope. You really need to take your documents and consult with a good business or franchise attorney in your area for specific advice.

Mr. Franchise - Kevin B. Murphy, B.S., M.B.A., J.D.

Franchise Foundations, a Professional Corporation

Under current law the non compete clause would not be upheld, but it does depend on the agreement and the circumstances.

Mr. Murphy is right; Mr. Selik is possibly wrong.

Non-compete agreements are lawful and upheld in connection with the sale of businesses, but only to the extent the clauses are reasonable in duration and geographic scope.

In order to predict whether a court is likely to uphold the clause in your agreement, an attorney would need to see, first of all, whether the clause contained time and geographical limitations, such as "XYZ County, for five years" and estimate whether the limitations were reasonably necessary to protect the goodwill of the business sold, and so forth.

If there are no limitations written into the contract, the judge might simply impose some limitations that seem reasonable, or, less likely, might rule that the clause was too broad for lack of limitations and refuse to consider enforcing it.

Mr. Whipple is exactly right. Unlike employment contract non-compete clauses which are almost always voidable, non-compete clauses in business purchase/sale contracts are routinely upheld and enforced as long as they are reasonable to protect the buyer's expectation of benefit from the goodwill of the business. There is little or no reason to buy an existing business rather than just opening a competing business if you are then going to have to compete with the seller in the same geographical area the next day. It is understood that the seller is selling the "going concern" value of the business, which is commonly identified as the "goodwill" of the business, and if the seller remains in the same trade in the same geographical area he can essentially steal back the goodwill he sold. That is why reasonable non-compete clauses will be upheld in sales of businesses. Whether any particular non-compete clause will be upheld, however, requires an analysis of the document and the facts and circumstances of the particular transaction and the business involved.