Why are non-compete agreements common?
Non-compete agreements are usually mandatory for 99% of all internet business transactions, especially when a website broker is advising on the transaction. As an entrepreneur myself, I've gone through the process to sell my website business prior to becoming a licensed business broker. As a result of my experience as an entrepreneur and website broker, I have a fundamental understanding of why non-compete agreements are so important to getting most deals successfully closed. When a buyer pays an earnings multiple on a website company's current performance, it's only fair that the buyer has an assurance that the seller won't start a new website business that directly competes against the business that was just sold. Sellers have a considerable amount of expertise within the industry that their website business competes in. The buyer usually doesn't have any direct expertise in the field, which is one of the primary reasons the buyer is purchasing an established business instead of using those funds to start a website business from scratch. If a seller sold their website business and then immediately started a competing website business using the money that was paid by the buyer, this would hurt the original website company's ability to grow since there would be a new direct competitor within the niche competing for market share.
In addition, one of the core assets being sold with a website business is the seller's experience. If the buyer didn't need the seller's experience, there would be very little reason for the buyer to invest hundreds of thousands of dollars as this money could be spent to build a competing business from the ground up. In fact, non-compete agreements are so important that transactions usually require a specific portion of the purchase price to be allocated specifically towards a covenant not to compete as it relates to reporting the sale to the IRS for taxes. In our experience as website brokers, less than 1% of the transactions we advise on closed without a non-compete agreement and there were a very special set of circumstances surrounding those specific deals. The overall goal of a non-compete agreement is to simply restrict the seller from operating a business that does exactly what the business he or she sold does. For example, if the business being sold sells golf clubs online, the non-compete agreement should restrict the seller from operating (or being involved with) any directly competing business that sells golf clubs or golf related products. This non-compete agreement would still give the seller the freedom to run an internet business post transition, as long as the new business venture doesn't directly or indirectly compete against the business that was just sold.