A good friend bought a message saloon about a year ago. He recently sought my advice on his causes of action against the seller who sold him the saloon. Why? The seller planned to open up a new message saloon next to his.
In most cases of the sale of business, it is important to consider whether the seller should be bound by a covenant to prevent competition in the selling of a business. The seller contributed to the value of the business's goodwill, if the seller competes with the old business after it has been sold, the value may be diminished in the hands of the buyer.
It is highly recommended that an express Non-Compete agreement or provision be included in the contracts of the sale. If it does not exist, Massachusetts courts take the position that an agreement not to compete in such a manner is usually recognized as implied.
The courts usually look at business sale Non-Compete agreements with less scrutiny than employer-employee Non-Competes, and focus on equal bargaining power, whether sale proceeds provide the seller with support without need of immediate competition, and if a premium is paid so the seller agrees not to compete. If goodwill is a large part of sale, a Non-Compete agreement is necessary to make sure the buyer fairly receives what he/she bought. However, the courts may still engage in some limited scrutiny to make sure the Non-Compete is not against public interest.
In hybrid situations when the seller becomes an employee in the sold business to provide assistance to the transition, both the business sale and employer-employee Non-Compete could be related. In such a case, the courts have ruled that the business sale agreement would most likely apply.
If the purchase is of a business in a state outside of Massachusetts, one should review that state's law. Even if the agreement specifically states that Massachusetts law applies, it might be rejected if the dispute ends up in foreign jurisdiction and the two laws contradict.
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