Buying a business often means paying for more than its assets. You may also be paying for its customer relationships, goodwill and market position. If the seller immediately starts a competing company nearby, part of what you bought may be at risk.
The state generally voids employment noncompete agreements entered into on or after July 1, 2023. However, the law makes an important exception for business sales. A buyer and seller may agree to a limited noncompete as part of the transaction.
When can a noncompete in a business sale be valid?
Under Minnesota Statutes section 181.988, a noncompete in a business sale may temporarily prevent the seller from operating a similar business within reasonable geographic and time limits. The statute does not specify what makes those limits reasonable.
Because reasonableness depends on the circumstances, the scope of the agreement matters. When reviewing the proposed terms, consider whether it clearly addresses:
- The types of competing activities covered
- The geographic area subject to the restriction
- The length of the restriction
- The business interests the restriction protects
A broader restriction does not necessarily provide stronger protection. Courts may scrutinize or limit terms that reach beyond the buyer’s legitimate interests.
What makes a post-sale restriction reasonable?
State courts treat noncompetes in a business sale differently from employment noncompetes. Courts consider whether the terms go further than needed to protect the goodwill bought in the sale. They also consider whether the terms place an unfair burden on the seller or harm the public.
The right limits depend on the company. A business serving only the East Metro may need a different area than one operating across Minnesota or several states.
Addressing the restriction before closing
A seller noncompete should not be treated as an isolated provision added near the end of a transaction. Its terms should fit the purchase agreement and any role the seller will have after closing.
Legal guidance can help you assess how the noncompete fits with the rest of the deal and Minnesota law. Reviewing these issues before you sign can reduce uncertainty if a dispute arises after closing.