Business sales contracts generally include some form of a non-compete clause, but there are exceptions. For the most part, buyers are protecting their interests by ensuring that a seller cannot start a new business that competes directly with the business they have just sold. Laws on non-compete agreements vary from state to state, so it’s always advisable to have an attorney review the contract, whichever side of the deal you’re on. But here are some guidelines:

A non-compete clause protects legitimate business interests. Your agreement will make sure that the proprietary formula, processes, or other confidential business information remains confidential and becomes the property of the buyer. That includes customer lists, pricing formulas, training materials, and other material that is not generally available to the public.

Most non-compete clauses also forbid a seller from poaching employees from the company for a certain period of time after the sale. A non-compete that exceeds a few years (2-5 is common) or prevents an owner or key employee from obtaining employment is probably not enforceable. An owner can be prevented from starting a competing company, for example, but may be allowed to work for a competitor, especially if the number of employment opportunities is limited.

A non-compete agreement typically includes both geographic boundaries and a time limit. It’s reasonable to protect your share of a market, but it’s not reasonable to prevent someone from starting a company that doesn’t compete within the market, however it’s defined. An agreement that is too broad, time-wise or geographically, will not hold up in court.

Defining geography and other limitations can be tricky; a large customer may have operations in several markets and different vendors in each. Clear, unambiguous language and terms that outline how and by whom disputes will be resolved can reduce the likelihood of lawsuits down the road.

The definition of competition in the distilling industry differs from that in other sectors. When you sell an HVAC company, it’s pretty clear who competes with the business. All HVAC companies provide similar services, and the repair and sales processes are commoditized; most customers don’t care who fixes their A/C, as long as it gets fixed.

But the brewing and spirits industry is much more complex. Most who sell their company are not ready to retire. In fact, many go on to create new brands. As long as you’re not distilling and selling the same spirit in the same market (premium vodka, or single malt scotch, say), you’re generally not prohibited from getting back in the industry as soon as you’re ready. You can’t produce premium vodka, but you could start a tequila brand without violating the agreement. Most distilling brands take a few years to develop, so even serial entrepreneurs don’t eat into a buyer’s market share immediately, no matter how good their product turns out to be.

Key employees, such as master brewers or distillers, who the new owner does not retain, should have the right to seek employment with another company. Most agreements contain a clause that requires them to leave behind or destroy any proprietary information upon leaving. That includes formulas and the other sensitive and confidential company information listed above.

Non-compete agreements protect buyers against unscrupulous or dubious business practices. Your attorney can help you draft one that meets the buyer’s needs without placing undue or unfair restrictions on the seller.

The exceptions

Like all business deals, everything is open to negotiation, including non-compete clauses. We’ve seen deals where the buyer is so interested, they are willing to forgo the normal restrictions. Some buyers even encourage competition. With their mindset, if they can empower a startup specialist to spin up a new brand, get distribution and traction, they’ll buy that too. For the right buyer, it’s all about scale.

What this means is that, if you’re scared to list your business for sale, thinking that you’ll be driven out of the industry, don’t be. There are creative ways to protect everyone’s interests.

If you are in the market to sell or acquire a distilling business, book a call with us today or click here for a confidential and complimentary opinion of value.