Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Law Firm Stole the Business Sale with One Clause
Transcript
- Lucas: Luna, I want to tell you about a deal that went spectacularly wrong — not because of valuation, not because of financing, but because of one sentence in the purchase agreement. Luna: One sentence? That's terrifying. What happened? Lucas: A regional dental practice chain bought a single-location clinic from a dentist who was retiring. The purchase price was three point two million — a nice exit for a solo practitioner. The buyer was a private equity-backed roll-up, sophisticated team, lawyers on both sides. The non-compete clause said the seller agreed not to 'own, operate, or manage a dental practice within a ten-mile radius for five years.' Luna: That sounds pretty standard. Ten miles, five years — that's typical in healthcare. Lucas: It is standard. But the seller's attorney had added two words: 'as a dentist.' So the clause read: the seller would not 'own, operate, or manage a dental practice as a dentist.' Luna: Oh no. So the seller could... what, own it but not work in it? Lucas: Exactly. The seller didn't retire. He incorporated a new entity, hired two associate dentists to work the chairs, and opened a new clinic eleven miles away — technically outside the radius. But he was the owner and manager. He just wasn't practicing dentistry. Luna: And the buyer couldn't enforce the non-compete because he wasn't 'acting as a dentist.' That's a loophole you could drive a truck through. Lucas: The buyer sued, spent about a hundred and fifty grand in legal fees, and eventually settled for a reduced payout. But the damage was done — they lost a third of their patient base to the old owner's new clinic. Luna: So the lesson is: the non-compete needs to cover any role in the same business, not just the role the seller held. Lucas: Right. And it should also cover indirect ownership — holding shares in a competitor through a trust or an LLC. A lot of sellers think they can get around it by having their spouse or their cousin be the nominal owner. Luna: I've actually seen that. A friend of mine bought a landscaping company, and the seller's brother-in-law started a similar business two miles away. The non-compete only named the seller personally. They had to go back to court. Lucas: And the courts look at whether the restriction is reasonable in scope, geography, and duration. If you try to ban someone from working in any capacity anywhere in the state for ten years, a judge might throw it out entirely. Luna: So there's a balance. You want it broad enough to protect the business you're buying, but narrow enough to be enforceable. Lucas: And the best time to negotiate that language is during the letter of intent, not at the final purchase agreement stage. Because once the buyer has invested in due diligence, they're less willing to walk away over wording. The seller's attorney knows that. Luna: Which means the buyer should come with a draft of the non-compete already attached to the LOI. Lucas: That's exactly what the smart buyers do. They hand the seller a proposed non-compete clause that's already been reviewed by their attorney. It sets the baseline. Any changes the seller asks for are then concessions, not starting points. Luna: I love that. It's a power move that also protects the deal. Lucas: You know, if these conversations have moved your work forward in some small way — maybe helped you spot a clause in your own deal, or think twice about a piece of language — it'd mean a lot to us if you'd consider supporting the show. We keep it ad-free and listener-supported, and it really does make a difference. Luna: Yeah, it's a small gesture that helps us keep bringing you these deep dives into real business sales. Every bit helps. Lucas: If you're so inclined, you can find us at buymeacoffee dot com slash fexingo. That's buymeacoffee dot com slash fexingo. And now, back to that non-compete — because there's another layer to this story. Luna: There's more? What else went wrong? Lucas: The non-compete also had a clause that said it would be 'extended by the duration of any period of breach.' Sounds like a gotcha, right? But the buyer's attorney didn't realize that in that state, courts have ruled that such automatic extension clauses are unenforceable as a penalty. Luna: So even if they had won the lawsuit, the non-compete wouldn't have been extended. The seller could just wait out the original five years. Lucas: Exactly. So you need to draft the non-compete so that any breach pauses the clock, rather than extending it. A judge is more likely to enforce a suspension than an extension. Luna: That's a nuance most people wouldn't think about. So what does a bulletproof non-compete look like? Lucas: First, it should define the business broadly — not just 'dental practice' but 'any business that provides dental services, including but not limited to general dentistry, orthodontics, and oral surgery.' Second, it should cover the seller in any capacity: owner, manager, employee, consultant, independent contractor, volunteer. Luna: And third, it should include a non-solicitation clause that prevents the seller from contacting customers, suppliers, or employees. Lucas: Right. And that non-solicitation should extend to any entity the seller controls. Also, the definition of 'customer' should include anyone who was a customer within the past twelve months, not just current ones. Luna: Because a seller could argue that a customer who hasn't bought in six months is fair game. Lucas: Yes. And there's one more thing — the buyer should have the right to assign the non-compete if they sell the business later. Otherwise, the non-compete might die with the first buyer. Luna: So you need an assignability clause. That's smart — especially for private equity buyers who plan to roll up and then exit in three to five years. Lucas: Now, let me give you a real-world example of a non-compete that worked. A software company that did fleet management for trucking companies. They bought a smaller competitor for eight million. The seller's non-compete banned him from 'any business that provides software or services to the commercial trucking industry.' Luna: That's pretty broad. What happened? Lucas: The seller tried to launch a consulting firm that advised trucking companies on software selection. The buyer sued and won a preliminary injunction within thirty days. The judge said that 'providing advice on software selection' fell within 'services to the commercial trucking industry.' Luna: So the wording 'services to' was the key. It was broad enough to catch the consulting work. Lucas: Exactly. The buyer's attorney had drafted it to say 'including, but not limited to, software development, implementation, consulting, and training.' They left no gaps. Luna: That's the gold standard. In the dental practice case, they left a gap big enough for a whole new clinic. Lucas: And the gap was literally two words: 'as a dentist.' The seller's attorney later admitted in deposition that he put those words in intentionally, knowing his client wanted to keep working. Luna: So the seller was planning to compete from day one. That's the risk — a seller who signs a non-compete but has no intention of honoring it. Lucas: That's why buyers should also include a liquidated damages clause. If the seller breaches, they owe a fixed amount — say, twenty percent of the purchase price. That gives the buyer leverage without having to prove actual damages. Luna: But isn't there a risk that a court strikes down liquidated damages as a penalty? Lucas: Only if the amount is unreasonable at the time of contracting. If you set it at a multiple of the purchase price, a judge might toss it. But if you tie it to a reasonable estimate of the loss — like the projected revenue from the seller's patient list — it's more likely to hold. Luna: So you need to do the math upfront. Figure out what the business would lose if the seller competed, and put that number in the contract. Lucas: Right. And one more thing — the non-compete should be signed by anyone who owns more than five percent of the selling entity. If the business is owned by a husband and wife, both should sign. Even if the wife never worked there. Luna: Because she could start a business in her name? Lucas: Exactly. Or she could be the nominal owner while the husband runs it. You want to cover all the adults in the household. Luna: This is making me want to go back and read every non-compete I've ever signed. Lucas: It's worth it. A well-drafted non-compete is cheap insurance. A badly drafted one is a ticking time bomb. Luna: So if I'm a buyer tomorrow, what's my takeaway? Lucas: Start with the LOI. Include your proposed non-compete language. Make sure it covers all business activities, all roles, all related parties. And have a liquidated damages clause tied to a reasonable estimate of loss. Then, during due diligence, ask the seller to list every business or entity they have an interest in — so you can verify they're not already competing. Luna: That's a solid checklist. And for sellers? What should they watch out for? Lucas: Sellers should make sure the non-compete is reasonable and doesn't prevent them from earning a living in a completely different field. But they should also be honest with themselves — if they plan to compete, the buyer will find out. And the legal fees can wipe out the entire gain from the sale. Luna: Better to negotiate a shorter duration or a smaller radius upfront than to try to sneak around it later. Lucas: Exactly. And if the seller really wants to stay in the industry, consider an earnout or a consulting agreement instead of a non-compete. That way, the buyer gets the benefit of the seller's expertise, and the seller gets paid to help the transition. Luna: So the non-compete isn't always the right tool. Sometimes a collaboration agreement works better for both sides. Lucas: Right. The key is to think about what you're actually trying to protect — the customer relationships, the trade secrets, the goodwill — and then choose the right mechanism. A non-compete is just one tool. Luna: I think that's the biggest takeaway: don't just copy-paste a standard clause. Think about the specifics of the business and the people involved. Lucas: And always, always have a lawyer who specializes in M&A or business sales review it. The two words 'as a dentist' cost a buyer millions. Luna: Words matter. That's the story of this episode. Lucas: They really do. Next time, we'll talk about a clause that's even more overlooked than the non-compete — the entire agreement clause, and why a single email can blow up a deal. Luna: Looking forward to it. Until then, keep your contracts tight.