Avoid Some Not-so-healthy Competition

When you sign to close the deal on the purchase of your restaurant, you may expect the seller to ride off into the sunset, their job done. However, most people selling restaurants have more than a passing interest in foodservice. It's possible that the seller could open a new business not far from yours, or even roll in a food truck selling the best recipes that your new restaurant was known for. Those scenarios may seem far-fetched, but they do happen. A non-compete agreement can help protect you from sellers who may have designs on not-so-sneakily luring diners away from your restaurant.

A non-compete agreement is an agreement between two parties stating that one or both will refrain from doing business that competes with the other for a period of time. The kind of non-compete agreement that most often makes news in the restaurant industry are those between employees and employers¹ that have been hotly criticized for restricting employees' future job prospects. The scope of this discussion, though, is the kind of agreement between the buyer and the seller of a restaurant that details the behaviors the seller may not engage in for the months or years following the sale of the business.

Non-compete agreements are intended to protect you, the buyer of an independent restaurant, from having to compete with the previous owner should she desire to open a similar concept in the vicinity of yours. This gives the new owner a window in which to establish themselves. Non-compete agreements can be rolled into your sales contract or covered in a separate document. Here are four details any worthwhile non-compete agreement should include.

What a Non-compete Agreement Should Include

The geographic area covered. Non-compete agreements generally cover a finite geographic area, so while one may bar a restaurant's previous owner from opening an identical concept in the same neighborhood, nothing will stop him or her from legally opening one in the town over. The geographic radius covered by your non-compete will be important to making sure it protects you, especially if you live in an area where people are used to travelling several miles to dine out.

The length of time covered. Non-compete agreements expire after a defined amount of time. You need to make sure that yours covers a span long enough to protect you from the seller's competition as you establish yourself. Given the failure rate of new restaurants,² a non-compete agreement can help provide that extra buffer against your dream business becoming a sad statistic.

Working for a competitor. Another common restaurant non-compete agreement clause is one that bars the seller from working for a competitor for a length of time. This is meant to prevent the seller from teaming up with established competition and using his experience to help them undermine your business by incorporating his brand, techniques, and signature items that may have helped initially put the restaurant you now own on the map.

Intellectual property and non-tangible assets. Depending on the terms of the deal, you may need to consider covering intellectual property and other non-tangible assets in your non-compete as well. Trademarks, logos, patented techniques, and any other intellectual property that make the restaurant you're buying unique should be covered in the terms of your deal, whether they're part of the general sales contract or covered in the non-compete agreement.

Making Your Non-compete Enforceable

Non-competes are treated differently in each state. Historically, many courts have been hard on non-compete clauses since they, by name and intent, generally stifle competition between businesses. As you prepare a non-compete agreement to go along with buying your business, consult an attorney who is well-versed in restaurant non-compete laws in your state and how courts have historically responded to lawsuits involving them. Having an experienced hand help you draft the contract will help ensure that it is legally enforceable if it is challenged.

References

Jimmy John's 'Oppressive' Noncompete Agreement Survives Court Challenge. Huffington Post. Accessed January 2022.
Food Network Chef Robert Irvine Shares The Top 5 Reasons Restaurants Fail. Business Insider. Accessed January 2022.