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Should Business Partners Sign Non-Compete Agreements?

November 11, 2021

Est. Reading: 2 minutes

Most business owners contend that non-compete agreements are necessary for startups and established businesses alike to grow with confidence. After all, what’s the point of hiring, onboarding, and training a new employee if the employee can simply use that information to jump ship and launch a competitor after only a few months?

The same consideration comes into play with business partnerships. Business partners work together to create a successful business, so why would one partner be allowed to use proprietary information to start a competing business right after—or even during—their stint with the partnership? 

Basics of a Non-Compete Agreement

Besides protecting trade secrets and other intellectual property, a key strategy for preventing this situation is having all business partners sign non-compete agreements. A non-compete agreement is a restrictive covenant, meaning it is a contract between parties who all agree not to do something. 

A non-compete agreement must be reasonable in scope to be considered legally enforceable. For instance, a non-compete agreement for any particular business should be limited to the territory where the business actually operates. It must include a reasonable time frame (one to three years after the business partner leaves is a rule of thumb). And, the subject matter of the non-compete agreement must directly relate to the original business. In other words, you could not prevent a former business from starting a restaurant if the business partnership was a financial services company. 

Include the Non-Compete Agreement in the Partnership Agreement

It is always wise to include a partnership agreement for a business partnership in Arizona. Among many other things, this contract lays out the responsibilities of each business partner. It can also include a reasonable (and, thus, legally enforceable) non-compete agreement. Having an attorney draft a non-compete agreement and include it in the partnership agreement is the strongest way to protect the business. 

should Business Partners Sign Non-Compete Agreements

Signing a Non-Compete Agreement After the Fact

If your business partnership is coming to an end and the departing partner has not signed a non-compete agreement, the lack of leverage you have to compel them to sign such an agreement requires you to get creative. As always, business partners have fiduciary duties to the partnership. This means they must act and make decisions in accordance with the best interests of the partnership, which might give you some cover if you propose a non-compete agreement. 

If the departing business partner is selling their ownership interests to you, consider adjusting the purchase price to encourage signing the non-compete agreement. Remember: the crux of any contract is consideration. If your business partner agrees to a non-compete agreement, he or she must get something out of it. This only bolsters your side.

The best defense against a messy breakup with your business partner is a thoroughly negotiated partnership agreement. These agreements often have non-compete clauses. If you have been operating without a non-compete agreement and are worried about your partner leaving to start a competitor, time is of the essence. Call a knowledgeable Arizona business attorney today to protect your business and preserve your professional relationships with us at Monahan Law Firm, PLC.

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Attorney Patrick Monahan

Patrick Monahan

Patrick Monahan is the managing partner of Monahan Law Firm, PLC. Patrick began his legal career practicing real estate, construction, and general business litigation.
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