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Colorado Non-Competes in the Sale of Businesses

Mar 07, 2016

ENFORCEABILITY OF NON-COMPETITION AGREEMENTS

IN BUSINESS SALES

By: Craig Watrous

We’ve written a number of blog posts and articles on the enforceability of non-compete agreements in Colorado.  There’s often a misconception that non-competes aren’t enforceable in Colorado. This is simply untrue. Non-compete agreements are enforceable in Colorado, but they must fall under one of the exceptions in Colorado’s non-competition statute §C.R.S. 8-2-113. One question that often comes up is: are non-compete agreements enforceable when they are made in connection with the sale (or purchase) of a business?  The short answer is yes. In addition, I can’t imagine many circumstances when the buyer of a business wouldn’t want some form of non-compete with the owners of the business that’s being bought. 

The Colorado non-compete statute §C.R.S. 8-2-113 reads in relevant part as follows:

“Any covenant not to compete which restricts the right of any person to receive

compensation for performance of skilled or unskilled labor for any employer shall be void, but this subsection (2) shall not apply to:

(a) Any contract for the purchase and sale of a business or the assets of a business; 

(b) Any contract for the protection of trade secrets;

(c) Any contractual provision providing for recovery of the expense of educating and

training an employee who has served an employer for a period of less than two

years;

(d) Executive and management personnel and officers and employees who constitute

professional staff to executive and management personnel.”

 

Colorado’s statute includes a specific carve-out allowing parties to draft non-competes in connection with the purchase of a business. If you’re buying a business just think how distraught you would be if upon buying that business, the seller took your money and then set up a competing business across the street.  The idea behind putting a non-compete in place with the sale of a business is to protect the business goodwill that the buyer is acquiring. 

There are some caveats though that must be followed. The non-compete must be reasonable.  This means that the duration, scope and geography all have to be carefully considered and have a reasonable connection to the restrictions that are being put in place. Colorado courts have consistently upheld covenants not to compete when they are related to the sale of businesses.  Moreover, the courts have traditionally applied a less restrictive reasonableness standard when compared with non-competes in employment contracts.  The courts presume that the seller of a business has equal bargaining power to negotiate a deal that’s reasonable. Also, the seller is being compensated for the non-compete by an increase in the selling price       

There are a number of legal and strategic reasons why non-competes in the purchase of a business are important.  There are also a number of tax benefits that can be achieved. This is another reason why it's valuable to have both an attorney and accountant working with you through your business acquisition.  

The attorneys at Mallon & Lonnquist are experienced in mergers and acquisitions, representing both sellers and buyers.  We are also experienced in drafting and enforcing non-competition, non-solicitation and non-disclosure agreements in Colorado.  Please contact us if you would like to speak with us about drafting or enforcing non-competes.

(MLMW, is a business, employment and civil litigation law firm. Craig T. Watrous is a partner with MLMW, based in Denver, Colorado. Craig regularly represents clients on both sides of covenants not to compete in transactions and disputes. Craig can be reached at cwatrous@mlmw-law.com or (303) 722-2165)

 

 



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