Published October 27, 2011

Non-Compete Agreements in Small Company M&A

By Paul Wormley

Non-compete agreements are a standard part of the small company sale process. Buyers need to be assured that sellers (and their key managers) are not going to turn around and use their unique skills, relationships and know-how to set up competing businesses.

Hadley Capital seeks five year non-competes with broad restrictions. In most cases, these terms are not a problem. The sellers are selling precisely because they want to exit and pursue other passions, not to get back into the business. However, we have had a few occasions where the terms of a non-compete have become an issue. This is a major red flag for us: Unless a seller has designs on competing he really shouldn't should be concerned with the terms of the non-compete.

This issue is so important to Hadley Capital that we actually walked away from an acquisition because of it. It happened right at the end of an acquisition process. The seller told us that he wouldn't sign a non-compete despite the fact that the terms had been outlined in our letter of intent. We had already spent a lot of time and money working to close the deal, but we decided that our sunk costs paled in comparison to the risk of the seller opening a competing business and so we moved on.