- Posted on April 6, 2022
- by Benedict Dohmen
An In-Depth Look At The Non-Compete Agreement
Before completing your Amazon FBA exit, an Amazon aggregator will typically ask you to sign a non-compete agreement. It is one of the most important documents you’ll sign when selling your Amazon FBA business. If you’ve not encountered one before, you may ask, “What is a non-compete agreement, and what does it involve?”
A non-compete agreement simply protects the interests of an Amazon roll-up firm after they’ve bought your Amazon FBA brand. This article will walk you through everything there is to know about signing a non-compete agreement and what it means for you as an Amazon FBA seller.
Table of сontents:
What is a non-compete agreement?
Non-compete agreement definition: A non compete agreement involving the sale of a business typically provides that, in exchange for a specified payment (which may be part of the sales price), the seller will promise not to go into a similar type of business within a certain geographic area for a specified period. – The Business Litigators
Non-compete clause
The agreement which binds the sale of the business is a negotiable contract. Although buyers will want to ensure that you don’t compete directly with them following the sale of your business, they usually won’t mind if you continue selling other non-competing products on Amazon.
How does a non-compete agreement work?
Essentially, a non-compete agreement is a contract between an Amazon FBA acquirer and seller in which the Amazon FBA seller agrees not to establish any businesses that directly compete with the Amazon FBA buyer’s newly acquired business.
Non-competes come into effect when someone sells their Amazon FBA brand. The Amazon aggregator will ask the Amazon FBA seller to sign a non-compete agreement to prevent them from setting up a new FBA business that actively competes against the brand they just sold. The period may vary depending on what is stated on the Amazon FBA roll-up firm’s NCA.
For instance, an Amazon FBA seller who has sold a swimwear business to an Amazon FBA buyer shouldn’t start a similar venture for at least six months. They may, however, build a new business that is entirely unrelated to swimwear.
The non compete agreement is part of the LOI (Letter of Intent) and the final Purchase agreement.
Not sure how what an LOI contains? Here are a few resources to get you started:
Is a two-year non-compete legal?
The answer is that it depends upon the clauses at the time of agreement. A typical non-compete agreement should not exceed more than a year in most cases, which is considered a reasonable duration.
However, in cases where the seller breaches a fiduciary duty—or fails to act in the best interests of the other party—it may be extended to two years.
How serious is a non-compete agreement?
Now that you understand what a non-compete agreement is, you’re probably wondering exactly how serious it is. Or maybe you’re just asking yourself, “Is a non-compete a legal document?”
First, it’s important to know the legal status of non-compete agreements in your state. Although to be fair, your Amazon aggregator’s legal team has probably already looked into it for you. That said, it doesn’t hurt to be well-informed.
Laws may differ from state to state. Besides, some states such as Hawaii, North Dakota, Oklahoma, and California have banned non-compete agreements. They do not recognize such agreements, and you may get sued for enforcing them.
However, generally speaking, Amazon FBA acquirer non-competes are completely legal. There are a few limitations that you should be aware of, though. While it may seem one-sided, there are certain considerations when it comes to enforcing a non-compete to make sure that every limitation is reasonable. The addition of these reasonable terms ensures that the agreement is not just in favor of the aggregator.
Non-compete agreements are tough to enforce because they limit the future options of an individual or a business owner. Plus, non-compete agreements that place too many restrictions on a person might not be enforced in some states.
That said, non-competes can likely get more enforcement if they’re limited by the time and scope of the agreement since this allows the seller to look for new opportunities elsewhere.
Ensuring that non-compete agreements remain reasonable
The definition of reasonable restrictions may vary on a case-to-case basis. But typically, they revolve around the following factors:
- Duration
- Trade
- Geographical location
How long should non-competes be to determine if the court will count them as legal?
A good rule of thumb to remember is that a non-compete shouldn’t exceed the amount of time an Amazon FBA buyer needs to recover. For most industries, a 6-month term is considered reasonable enough.
However, this period will also be greatly influenced by your books and how long the Amazon roll-up firm decides it will need to start making a profit from your business.
Is the non-compete clause important?
The non-compete clause in many business contracts restricts the business owner from starting another business in the same niche. The agreement helps protect trade secrets and internal information for the Amazon roll-up firm while also preventing the owner from becoming a competitor.
What happens if you break a non-compete?
After finding out about the legal aspects of non-compete clauses, you might ask, “What is the penalty for breaking a non-compete clause?” It may feel intimidating when the law is involved and you have signed papers stating what you can and cannot do.
Typically, an Amazon FBA aggregator may sue you if you decide to break the terms of your agreement. You should therefore take a non-compete very seriously. Otherwise, a breach in your contract may mean shelling out a larger sum than what you were initially paid. Penalties may vary from state to state.
Key takeaway
A non-compete agreement is standard in the process of finalizing your sale with an Amazon FBA buyer. It’s also important to keep in mind that non-competes are legally binding.
That said, it doesn’t mean you can’t rekindle the spark you once felt when you first opened your Amazon FBA business. It just means that you can’t open a similar venture on Amazon for some time to give your Amazon FBA buyer enough time to find a foothold.
Contact Us to learn more about how you can get started today and get through the non-compete agreement without legal issues.
Now it is your turn – do you have a question for the Benitago team? Or maybe you want to start a conversation with like-minded individuals? Feel free to share your thoughts in the comment section below!
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