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The Agreement That Tells You What You Can't Do

 

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From time to time owners will ask us if they will need to sign a non-compete agreement.  The answer stays the same:  "Yes, Yes, Yes. Buyers will always want a non-compete."

An essential part of every practice sale/purchase is the non-compete clause. This clause or agreement is essentially a protection for the buyer that spells out what a seller cannot do in regards to performing accounting, tax and related services after the sale. The non-compete clause can be a part of the purchase agreement or a separate document.

In some sense, owners are selling something that does not even belong to them-the clients and the likelihood those clients will return to the new owner for services.  There are a variety of reasons why a client might not want to go to the buyer.  But none is bigger than the scenario of a prior owner who either stays in business or who might soon return to that business.  Assuming that the clients are happy with the owner and satisfied with services provided, why would they go to a new buyer if the former owner is still providing the same services?  The best thing for the buyer is that the owner is completely out of the business and not even continuing to do work for any clients.  A non-compete spells that out and gives the buyer some legal recourse in the event a seller does become a competitor.   It is certainly hard to understand how a seller can justify selling something, in this case work for certain clients, then taking that back without compensation.  Unfortunately, it does happen at times.

Courts require that non-compete agreements have limitations, usually in the form of both geographic and time limitations.  A buyer cannot prevent a person from ever plying his or her profession throughout the whole country!  Typically, a clause will say something to the effect that the seller is prohibited from doing tax and accounting services within 20-30 miles of the existing office.  Or the clause might specify a county-wide area.  In addition, there will usually be a time period like 3 to 5 years for the prohibition.

Buyers and sellers need to do their research on how much, if any, of the purchase price should be allocated to the non-compete agreement.  There are tax implications for both parties. There can also be legal implications tied to the enforceability of the agreement and the " cost" of the agreement.

It is easy to see that non-compete agreements are essential but also somewhat complicated.  Please use professionals in helping with your sale or purchase.

For all of your buying and selling needs, contact APS at www.APS.net or call 800-397-0249.

Contact APS Holmes Group team
Email : holmesgroup@apsleader.com



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Source: APS Holmes Group

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