Enforcing Non-Competes in the Sale of a Business Under Washington State Law

Washington State has some of the strictest laws in the nation regarding non-compete agreements for standard employees, requiring high salary thresholds and strict time limits. However, when you are purchasing a business in Seattle, Spokane, or Tacoma, the rules completely change. The value of a business often lies in its reputation, customer list, and "goodwill." If the founder sells you their company on Friday and opens a directly competing business on Monday, your investment is destroyed. Fortunately, Washington law carves out a massive exemption for non-competes tied to the sale of a business. To ensure your purchase agreements are airtight and enforceable, we strongly recommend browsing our directory to hire a local Washington M&A attorney.

The Sale of Business Exemption Explained

Under the Washington Non-Compete Act, codified in Wash. Rev. Code § 49.62.010, a noncompetition covenant does not include a covenant entered into by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest. This means the strict salary thresholds (which generally require an employee to earn well over $120,000 to be restricted) do not apply to business sellers. However, courts like the King County Superior Court, Seattle will still evaluate these sale-of-business non-competes under the common law standard of "reasonableness." The restraint must not be greater than reasonably necessary to protect the buyer's newly acquired goodwill.

Restricting Minority Shareholders

When buying a company, you might acquire shares from multiple founders or minority shareholders. It is vital to require all equity holders receiving a payout to sign a non-compete. If a 10% minority shareholder cashes out and is not bound by a restrictive covenant, they can immediately use their insider knowledge to compete. Courts generally uphold these restrictions against minority shareholders provided they genuinely received consideration for their ownership interest, as seen in longstanding precedents like Perry v. Moran, 109 Wash. 2d 691 (WA Supreme Court 1987), which established the overarching tests for reasonableness.

Key Employees Retained Post-Acquisition

A major complication arises when the seller agrees to stay on as an employee for a transition period. Buyers must carefully draft two separate provisions: one tied to the sale of the business (which is highly enforceable and can last for several years) and one tied to their ongoing employment (which is subject to the strict rules of the WA Non-Compete Act). Mixing these up can lead a judge to invalidate the restriction. Always explicitly state that the non-compete is granted in consideration for the purchase price of the business goodwill.

Retiring Founders

Often, a founder in Bellevue or Vancouver sells their business with the intent to retire. Even if they say they are done working, you must get a signed non-compete. "Retirement" can quickly become boring, and without a legally binding restriction, nothing stops them from returning to the industry as a consultant. For retiring founders, geographic restrictions should cover the entire market area where the business currently operates.

Step-by-Step Process for Drafting and Enforcing

Drafting an enforceable non-compete during an acquisition requires precision. If the seller violates the agreement, you must be prepared to act swiftly through the courts.

Step 1: Define the Protectable Interest

In your Asset Purchase Agreement (APA) or Stock Purchase Agreement (SPA), explicitly allocate a specific portion of the purchase price to "Goodwill and the Non-Competition Agreement." This proves that the seller was directly compensated for their promise not to compete.

Step 2: Set Reasonable Time and Geography Limits

Do not overreach. While sale-of-business non-competes can last longer than employment non-competes (which are typically capped at 18 months), a 5-year, nationwide ban for a local plumbing business in Olympia will likely be struck down. Limit the geography to the counties where the business actually operates (e.g., King, Pierce, and Snohomish counties) and the duration to 2 to 5 years.

Step 3: Monitor for Breaches

After closing, keep an eye on the market. If the seller begins soliciting your clients or opens a new shop in violation of the agreement, gather undeniable proof, such as marketing materials, witness statements, or corporate filings from the Washington Secretary of State, Olympia.

Step 4: Seek an Injunction

If a breach occurs, your attorney will immediately file a lawsuit and request a Preliminary Injunction to legally force the seller to shut down operations while the lawsuit proceeds. This typically involves filing a Form CICS, Washington, Superior Court, Case Information Cover Sheet along with a complaint for breach of contract in your local Superior Court.

How Much Does it Cost in Washington?

Protecting your business investment involves upfront drafting costs and potential litigation fees:

• Drafting the Agreement: A business attorney typically charges between $1,500 and $4,500 to draft and negotiate a bulletproof M&A non-compete as part of a larger transaction.
• Court Filing Fees: Filing a civil lawsuit in a Washington Superior Court costs approximately $290.
• Litigation Costs: If you must sue to enforce the non-compete and seek an injunction, expect to pay attorney retainers ranging from $10,000 to $25,000 upfront. Most commercial lawyers bill at $350 to $700 per hour.

How Long Does the Process Take?

Drafting the agreement takes a few weeks during the deal negotiation phase. If the seller breaches the agreement, obtaining a Temporary Restraining Order (TRO) or Preliminary Injunction can happen very quickly-often within 7 to 14 days of filing the lawsuit. However, fully litigating a breach of contract case to recover financial damages can take 12 to 18 months in busy venues like the Pierce County Superior Court, Tacoma.

Frequently Asked Questions (FAQ)