What Small Businesses Need to Know About Non-Competition Agreements

Small business owners face many legal challenges as they grow as an enterprise. However, employment issues probably bring up the most legal concerns for a business owner. One of the legal tools that a small business owner can use to help protect themselves and their business interests is the non-competition agreement. This type of agreement should be used when buying a company, when hiring independent contractors, when hiring regular employees, and under any other circumstances or for any relationship that allows outside people to have contact with market sensitive information about your company.

The non-competition agreement will need to be a separate document that outlines the restrictions of business practices and activities that the second party will need to agree to before you will be willing to enter into a contract with them. It is important to note here that this document will also need to be referenced to, and attached to the main contract to be valid. This will also help to ensure that the participating parties will not be able to deny knowledge of this agreement in cases of breach.

Non-Competition Agreement for Business Purchases

The first case scenario that requires a non-competition agreement occurs when you purchase a business or franchise from someone else. It is important to draw up a non-competition agreement in this instance to prevent the seller from setting up a similar business across the street or in your business territory. The non-competition agreement will need to outline what restrictions you feel are necessary to protect your investment in the company. For example you will want to outline what types of business activities you want to restrict and for how long. In the case of a franchise, you probably will want to restrict the areas in which the seller will be able to set up another franchise, and possibly a time frame that they must wait before establishing another branch of the same franchise as the one that you just bought. This will allow you to build your clientele and establish your business before you have to worry about competing against another branch of your franchise, or a competing vendor. The non-competition agreement should be referenced to in your sale’s contract, and it should be attached to the final contract.

Non-Competition Agreements and Independent Contractors

When you hire an independent contractor to do work for your company a non-competition agreement may be warranted, especially if they will be working with trademark technology, concepts, or product developments. The non-competition agreement in this case will need to outline the specific business activities that will be prohibited after your contract has terminated, as well as the amount of time that the agreement will be in effect. For example if you operate a web site development firm and hire an independent contractor to develop web sites for you, your non-competition agreement may include issues like not soliciting your clients for outside work, and agreeing not to work for one of your competitors during the time that they are working for you, as well as restricting them from these activities after their contract has expired for period of X years or months. Like the other scenarios the independent contractor non-competition agreement will need to be referenced to, and attached to the work contract.

Non-Competition Agreements and Regular Employees

Non-competition agreements also can be appropriate when you are hiring a regular employee. In this instance the issues will be the same as those brought up with an independent contractor, however, as a regular employee they will have greater access to sensitive information and materials that could weaken your competitive edge if applied to other business ventures that you don’t own. Again the specifics about of what business activities and the duration of the restrictions will need to be clearly outlined in your non-competition agreement, and it will need to be referenced to, and attached to, the employment contract.