Selling a Business in Colorado: How the C.R.S. 8-2-113 Exemption Impacts M&A Non-Competes
Selling a business in Colorado requires strict compliance with C.R.S. § 8-2-113(3)(c). While most non-competes are void, a vital M&A exemption allows buyers to protect their investment and purchased goodwill when properly drafted.
When you sell a business, the buyer is paying for more than just your equipment and inventory. They are paying for your customer base, your brand reputation, and your market share-collectively known as "goodwill." Naturally, a buyer will want a promise that you won't take their money on Friday and open a competing shop next door on Monday. However, Colorado has notoriously strict laws against restrictive covenants. Navigating this landscape requires precision, and finding a qualified M&A lawyer in our directory can help you close your deal without legal missteps.
The C.R.S. 8-2-113 Exemption for Business Sales
In Colorado, standard non-compete agreements for regular employees are generally void unless they meet very specific salary thresholds and protect trade secrets. However, C.R.S. § 8-2-113(3)(c) provides a crucial carve-out: non-compete covenants are permissible when entered into by an owner in connection with the purchase and sale of a business, an ownership share in a business, or substantially all of its assets. This statutory exemption exists specifically to protect the buyer's right to the goodwill they just purchased. If a non-compete goes beyond statutory limits, a Colorado judge can invalidate it entirely, leaving the buyer unprotected.
Navigating Restrictive Covenants by Niche
Geographic Limitations for Retail vs. SaaS
A non-compete must be reasonable in both time and geographic scope. If you are selling a retail storefront or a local service business in Denver or Colorado Springs, a reasonable geographic limitation might be a 5-mile or 10-mile radius. However, if you are selling a Software as a Service (SaaS) company based in Boulder that serves a global market, a local radius is useless. For SaaS businesses, lawyers generally focus on restricting the seller from targeting a specific list of clients or competing in a highly specific digital niche, rather than drawing a circle on a map.
Covenants for Key Employees vs. Minority Shareholders
In many transactions, key employees hold a small percentage of equity. Under C.R.S. § 8-2-113(3)(c) as amended by Senate Bill 25-083, Colorado established an explicit statutory formula governing restrictive covenants for minority owners. For an individual who owns a minority interest (less than 50%) acquired as equity compensation or in connection with services rendered, the maximum duration of the non-compete in years cannot exceed the total consideration received from the sale divided by their average annualized cash compensation (including distributions and dividends) received from the business over the preceding two years. For standard employees who hold no equity, the sale-of-business exemption does not apply, and any post-employment restriction must satisfy Colorado's standard salary threshold rules under C.R.S. § 8-2-113(2)(b).
Look-Back Periods for Determining Transaction Value
When drafting these covenants, attorneys often review the historical financials of the business to justify the length and scope of the non-compete. By looking back over the trailing 12 to 36 months of revenue, a buyer can mathematically justify why they need a multi-year non-compete to recoup their investment and secure the goodwill they purchased.
Step-by-Step Process for Drafting an M&A Non-Compete
Whether you are operating in Fort Collins or Pueblo, the process of finalizing a non-compete during a business sale generally follows these steps:
- Identify the Sellers: Determine which owners and key personnel actually pose a competitive threat to the new buyer.
- Determine Equity vs. Employment Status: Separate majority owners from employees and minority shareholders, as the C.R.S. § 8-2-113(3)(c) exemption and its duration formula apply differently to each group.
- Negotiate the Scope: Agree on a realistic timeframe and a reasonable geographic or industry-specific boundary.
- Draft the Purchase Agreement: Embed the restrictive covenants into the main purchase contract or use standalone restrictive covenant agreements attached as exhibits.
- Include Savings Clauses: Your lawyer will add severability clauses, asking the court to modify the agreement rather than void it entirely if it is deemed slightly too broad.
How Much Does it Cost in Colorado?
M&A legal fees vary widely based on the size of the deal and the complexity of the non-competes. Here is a general breakdown:
| M&A Attorney Fees (Mid-Market Deal) | $15,000 - $45,000+ for comprehensive deal structuring |
| Non-Compete Drafting & Review | $1,500 - $4,000 as a standalone task within the deal |
| Colorado Secretary of State Filings | Under $150 for standard entity updates at the Colorado Secretary of State, Denver |
How Long Does the Process Take?
Negotiating a mid-market business sale in Colorado typically takes 3 to 6 months. Drafting the restrictive covenants usually happens during the due diligence phase, which takes about 30 to 60 days. It is critical not to rush this phase, as a poorly drafted non-compete can jeopardize the entire value of the transaction.
Frequently Asked Questions (FAQ)
Can a buyer force me to sign a nationwide non-compete?
Generally, a nationwide non-compete is very difficult to enforce in Colorado unless the business truly has a national, active customer base and the restriction is necessary to protect the buyer's goodwill.
What happens if the non-compete is found void?
If the covenant violates C.R.S. § 8-2-113, it may be struck down entirely. Furthermore, Colorado law imposes statutory penalties of $5,000 per violation on employers who attempt to enforce illegal restrictive covenants.
Does this apply to non-solicitation of clients?
Yes, non-solicitation of customers is heavily scrutinized under the same Colorado statute. It must be narrowly tailored to protect trade secrets or the goodwill purchased in the sale.
How does this affect my employees after the sale?
Standard employees who do not own the business cannot be bound by the sale-of-business exemption. To restrict them, the buyer must rely on Colorado's standard salary-threshold rules for highly compensated workers under C.R.S. § 8-2-113(2)(b).
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