When acquiring a business, it is crucial to pay attention to non-competition clauses.
These clauses protect the buyer from the risk of the seller engaging in competitive activities after the acquisition, which can undermine the value of the acquired company.
Importance for buyer
Protective clauses are important for the buyer. This is because a well drafted (non-)competition and relationship clause prevents the seller from using its knowledge and customer relationships to start a competing business. This protects the buyer's investment and ensures the continuity of the business.
Considerations for seller
For the seller, such a clause means restrictions on future business activities within the same sector or region. It is therefore essential to carefully negotiate the terms, such as duration and geographic scope, to avoid unnecessary restrictions.
Legal concerns
A non-compete clause must meet certain criteria to be legally enforceable.
- Reasonable duration: According to the European Commission, a term of up to 2 years is usual, increasing to 3 years in case of transfer of specific know-how.
- Limited scope: The clause should only apply to the acquired business' area of operations.
- Specific activities: The clause should focus on the company's core activities.
Failure to comply with these terms may result in nullity of the clause.
Conclusion
Both buyers and sellers should take the non-compete clause seriously during a business acquisition. A balanced and legally sound clause protects the interests of both parties and contributes to a successful transaction.
