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Covenant Not to Compete

A non-compete agreement or covenant not to compete between a buyer and seller is almost always included in the Asset Purchase Contract. 


A buyer will not want to purchase a business, only to find that the seller is creating a new business just down the street that will compete with the one they purchased. Therefore, the buyer’s investment is usually protected by a restrictive covenant, where the seller cannot participate in competitive business activity. This is especially important in business purchases that are primarily goodwill-based. 


The most common terms for a non-compete agreement in a typical asset purchase agreement is within a certain geographical area (usually 25-50 miles) for a certain period of time (usually 2-5 years); however, these terms are completely negotiable. 

What If?

Many sellers have multiple related businesses or several different locations, and they are only selling one of them. Or a seller might just be selling a specific portion of their business. So, obviously, they can’t agree outright not to compete with the buyer of the business they are selling.

Now, depending on the circumstances, there can be certain carve-outs or an exclusion to a covenant not to compete, which would specifically address the unique situation of that seller. For example, an accountant just selling a portion of their accounting practice that specializes in one area. The seller might hang on to all of her bookkeeping clients, but sell the portion of the business she works on audits for. Or in the case of multiple business locations, they would obviously detail the geography limitations to exclude existing locations that the seller retains. Whatever the agreement is, both parties have to have a meeting of the minds.