Every company sale includes a non-compete agreement for the seller. It’s common sense and good business practice but also an acid test of an owner’s true commitment to selling. The reaction is sometimes surprising to the broker, the buyer, and even to the seller themselves.
If you’re unfamiliar with non-compete agreements, they’re a clause in the Sales Agreement that prohibits the seller from starting up or taking over a business that would compete with the new buyer. To be enforceable, the non-compete must have a limited timeframe (usually 3 – 5 years), a limited geographic area (say, 50 – 100 miles), and be specific to the industry. They usually include a clause that also prevents the former owner from poaching key employees. In my experience, the bigger the sale price, the longer the agreement’s terms. Whatever they include, the terms must be reasonable and defensible; you can’t stop a former HVAC owner from starting up an ice cream shop, for example.
When I consider taking on a listing, I make sure to bring up the non-compete clause. If an owner balks at signing a non-compete, it’s time to reconsider the whole idea of the sale. Usually, I find that younger owners, those not near retirement age, are most likely to react strongly. It suddenly makes the sale real; in a few weeks, they’ll be out of work and losing a big part of their identity.
I’ve had quite a few heart-to-heart conversations with these owners. Many of them are excited about the big payoff, but are also facing the fact that this is the only business they know – what will they do if they can’t do this for the next five years?
I remind them that they’re getting a big payday; hopefully, they’re certainly getting enough to support their family for the next few years. (If they’re not, the non-compete doesn’t make sense.) If they’re sad about leaving the industry, they probably should simply keep the business. Why would anyone sell a successful and profitable business, only to start over from scratch? Some owners think it through and do decide to hang on to the business; others get through the emotions and sign with no regrets.
It’s important to remember that the agreement doesn’t prohibit you from working in the industry; it’s only there to make sure you don’t run a business that will compete with your former company. You can take on a job performing HVAC services for any company: a property management firm, a local government, or an HVAC training school. You can keep doing what you’re good at, keep your skills sharp, and not drive your family crazy while you figure out what’s next.
