June 1, 2009
When made in connection with the sale of a business or the assets of a business, a noncompetition agreement executed by the selling business owner can help to protect the business buyer's right to enjoy the goodwill related to the business being sold. Without such an agreement in place, the selling business owner would be free to start a new competing company or assist a competitor.
Colorado statute specifically permits noncompetition agreements entered into in connection with the purchase and sale of a business or the assets of a business, despite the fact that Colorado public policy generally disfavors covenants not to compete. Noncompetition agreements made as part of a contract for the purchase and sale of a business or the assets of a business are one of only four recognized exceptions to the broad statutory prohibition against such covenants in Colorado.
However, even when the noncompetition agreement is statutorily permitted, courts will only enforce the agreement if it is reasonable in duration and geographic scope. To be considered reasonable under Colorado law, the noncompetition agreement must not be broader than necessary to protect the business buyer's legitimate interests, and must not impose hardship on the selling business owner. While the appropriate duration and scope will vary depending on the circumstances, courts applying this standard have enforced agreements restricting a selling business owner from competing for a 5 year period within a 50 mile radius of the business being sold.
Should you have any questions about buying or selling your business, feel free to contact our Business Transactions Practice Group.
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