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The importance of signing Non-competition or Non-disclosure agreements

Posted By on August 15, 2017

For both buyer and seller, a business purchasing process can be very lengthy and requires a lot of time and due diligence duty to verify if the said information and data is accurate. Only certain degree of information will be revealed in the sales report from the seller, and it is buyer’s responsibility to ensure if those past history of sales amount are true and will be on-going after the new ownership. Even with business broker involved, this process is absolutely necessary as the broker usually won’t represent either party, and not responsible for any inaccurate information provided by the seller.

In addition to that, there is another important factor to consider on the buyer’s end – signing a non-competition agreement. This is to protect the new owner by limiting the seller’s future business activity within certain parameters. This is an agreement, however between the seller and the buyer, and it could not be enforced into perpetuity which would make the preventive action difficult to be executed at the court. Other than the general sale agreement of business goodwill between the two parties, this type of non-competition agreement won’t be even recognized at the state court’s level. The best way to protect the buyer side would be to allocate a certain portion of the purchase price to the non-compete agreement. By doing so, if the seller opens a new store or tries to move away their existing customers to his/her new store, then this allocated portion of good will in the sale agreement could be argued as defendant and enforced at the court.

On the other hands, a potential buyer could be manipulating this entire process during the entire transaction process, and steal very important business secret such as customer information in the same geographic area. So here comes a Non-disclosure agreement signed by the potential buyers.

Usually buyers are located in the same area, and they already know the local customers and competitions. What if they first approach and ask about the critical information and won’t complete the transaction at the end and walk away with all the information that they would like to collect? It is also risky when buyer informs the seller’s long attained customers of their intention to sell the business property. Scared customers might be moving away to different vendor which would result in bad situation to the seller.

A solid non-disclosure agreement could prevent the confidential business information leakage, so considering to hire a qualified attorney to tailor such an agreement in specific details of your business environment is strongly recommended for business transaction.