Drafting Enforceable M&A Non-Competes in Minnesota: Sale of Business Exceptions to the New Ban
Minnesota recently banned standard employment non-competes, but buyers can still legally enforce non-compete agreements against sellers during the sale of a business. To protect your acquisition, these restrictions must be reasonable in time and geographic scope.
When you invest millions of dollars to acquire a successful company, the last thing you want is for the former owner to take your money and open an identical business right across the street. For decades, buyers protected their new investments using non-compete agreements. However, Minnesota law drastically changed when a sweeping ban on standard employee non-competes went into effect. This shift caused massive confusion for buyers and investors navigating middle-market acquisitions.
Fortunately, the law carved out a vital lifeline for mergers and acquisitions (M&A). While you generally cannot restrict a standard employee, you can still restrict a business owner who sells their company to you. Because the line between an "employee" and a "selling owner" can be blurry, properly drafting these covenants requires precision. If you are preparing to buy or sell a business, you can easily find an experienced local M&A attorney in our US Attorneys Directory to structure a legally bulletproof agreement.
Step-by-Step Process in Minnesota
Whether you are acquiring a tech firm in Minneapolis, a manufacturing plant in St. Paul, or a logistics company in Duluth, navigating the legal requirements for M&A non-competes generally follows a specific structural process.
Step 1: Establishing the Sale of Business Exception
Your first step is ensuring your transaction qualifies for the legal exception. Under Minn. Stat. § 181.988, standard employment non-competes are void and unenforceable. However, the statute explicitly allows non-competes when they are tied to the sale of a business, the sale of all or substantially all of the operating assets, or the dissolution of a partnership. Your purchase agreement must clearly state that the restrictive covenant is a material condition of the acquisition and that the seller is receiving financial consideration (money) in exchange for the business's goodwill.
Step 2: Structuring Non-Competes for Retiring Founders
When buying out a retiring founder, the risk of them returning to the market might seem low, but a non-compete is still essential. Founders hold immense institutional knowledge and customer loyalty. For founders leaving the industry entirely, buyers typically draft strict, long-term non-competes. If a founder later violates this agreement, you can seek a court injunction at a local court, such as the Hennepin County District Court, Minneapolis or the Olmsted County District Court, Rochester, to immediately halt their competing activities.
Step 3: Handling Minority Shareholders Selling Out
Complications often arise when dealing with minority shareholders who own only a small percentage of the company. Are they "sellers of a business" or just "employees" cashing out minor stock options? To ensure the non-compete holds up in court, the legal documentation must clearly tie their non-compete to the sale of their equity, not just their employment status. Buyers must ensure that these individuals sign documents explicitly acknowledging they are selling their ownership interest and that the non-compete is a required part of that specific financial transaction.
Step 4: Restricting Key Executives Retained Post-Acquisition
Often, a buyer wants the seller to stay on as a key executive or consultant for a transition period (e.g., 12 to 24 months). This creates a dual role: the person is both a former owner and a new employee. To comply with Minnesota law, the non-compete must be explicitly attached to the purchase agreement, not the new employment contract. The restriction must be framed as protecting the acquired goodwill of the business sale, rather than restricting the individual's future employment mobility.
Geographic Scope and Duration Limits
Even under the M&A exception, Minnesota judges will not enforce a non-compete that is overly broad. The restriction must be "reasonable." The landmark legal precedent in Bess v. Bothman, 257 N.W.2d 791 (MN Supreme Court 1977) established that a non-compete must only be as broad as necessary to protect the buyer's legitimate business interests. For duration, 3 to 5 years is typically considered reasonable in the context of a business sale. For geographic scope, the restricted area should directly match where the acquired company actually does business. If the business only operates in St. Cloud, a nationwide non-compete will likely be struck down or rewritten by a judge.
How Much Does it Cost in Minnesota?
Drafting precise M&A contracts and enforcing them requires a highly specialized legal approach, which comes with standard corporate billing rates.
| Service Phase | Estimated Cost in USD |
|---|---|
| Drafting M&A Restrictive Covenants | Typically $2,500 to $5,000 as part of the broader Purchase Agreement. |
| Corporate Attorney Hourly Rates | Generally $400 to $750 per hour for senior M&A counsel. |
| Filing a Lawsuit for Breach | Initial court filing fees are around $320, plus thousands in legal fees. |
| Seeking a Court Injunction | Can quickly exceed $15,000 to $30,000 in emergency litigation costs. |
How Long Does the Process Take?
Drafting and negotiating the non-compete terms usually happens during the due diligence phase, which takes 60 to 90 days prior to closing. If the seller later breaches the agreement, seeking an emergency temporary restraining order (TRO) in a Minnesota District Court can take just a few days or weeks. However, completing a full civil lawsuit for financial damages due to a breached non-compete can drag on for 12 to 18 months.
Frequently Asked Questions (FAQ)
Does the 2023 Minnesota ban apply to agreements signed before the law passed?
Generally, no. The Minnesota statute banning standard employee non-competes applies to contracts entered into on or after July 1, 2023. However, even older agreements must still be reasonable in scope to be enforceable.
Can a seller just start a business in Wisconsin to bypass the agreement?
It depends on the geographic language in the contract. If your non-compete explicitly covers the Midwest or includes neighboring states where the business had active customers, a Minnesota court can still enforce the restriction against the seller.
What happens if the judge thinks the non-compete is too long?
Minnesota follows the 'blue pencil' doctrine. This means that if a judge finds a 10-year restriction unreasonable, they generally have the power to rewrite the contract and reduce it to a more reasonable timeframe, like 3 years, rather than throwing out the entire agreement.
Can I stop a seller from hiring away my new employees?
Yes. In addition to non-competes, M&A agreements should always include strict non-solicitation clauses, which legally prevent the seller from poaching your employees, vendors, and existing clients.
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