A Non-Compete Shouldn’t Be a Trap: How Non-Competes Work in Oil and Gas

If you have recently sold your business in the oil and gas industry, or if you plan to sell in the near future, you may have questions about your non-compete agreement.  There is so much to negotiate in the sales process, from valuation to transition planning, that sellers sometimes misunderstand or downplay their non-compete until they consider beginning a new venture.  While laws on non-compete agreements may differ from state to state, consider the following information about a standard non-compete in oil and gas.

The Purpose of a Non-Compete

Non-competes are typically signed by sellers to ensure that they will not directly compete with the new business owner after the existing business changes hands.  While a non-compete may seem to limit the seller of an oil and gas business, it is put in place to protect the post-sale interests of the new owner.  For this reason, the buyer typically sets the terms of the non-compete, but these can be negotiated by the seller as well, and should not be so restrictive that the seller cannot make a living after the sale.  Terms may vary, but they are typically limited to a specific time frame, geography, and industry niche.

Non-Competes Have a Set Geography and Time Limit

The oil and gas industry in the United States covers many states.  Your non-compete should not span the continent, keeping you from doing business thousands of miles away.  Instead, the non-compete will be focused on the set geographic region where the business is currently located.  This means that if you are selling an oil and gas services company in southwest Texas, you should be able to run the same type of company in California or New Mexico.

In addition, to set geographic terms, your non-compete will also have a time limit.  The new owner cannot require you to remain out of competition forever, and should, over the course of time, begin to build solid relationships with customers and employees.  Therefore, after a period of time negotiated in the non-compete, you will be able to compete directly with your previous business again, whether through employee recruitment or customer relationships.

Non-Competes Have a Specified Niche

The common misconception with oil and gas non-compete agreements is that a seller cannot work within the industry at all until the terms of the contract have expired.  Fortunately, this is simply not the case with most non-competes.  The oil and gas industry is large, comprised of many different business types, from service companies to backflow operators and shipping companies.  Be sure that you negotiate an agreement that allows you to continue working in the oil and gas industry as a whole while avoiding the particular niche in which your business currently operates.

Remember, the purpose of a non-compete is to ensure that you will not directly compete with the existing business.  In most cases, you may even be able to work with your existing customer base, so long as you are not driving them away from your previous business.  For instance, your new backflow business may directly deal with the same customers as your oil and gas services business, but not directly compete for those customers.  Therefore, don’t hesitate to use your vast knowledge of oil and gas to begin a new venture in a different niche of the industry.

Work With an Experienced Business Broker

Whether you are beginning to negotiate your non-compete or you are starting to analyze an existing one, these agreements can be challenging to interpret.  For this reason, it is best to work with a business broker who is experienced in the oil and gas industry.  With your broker, you will feel confident in agreeing to terms that are reasonable and fair, allowing you to continue working in oil and gas in the future.  If you have a non-compete agreement already in place, your broker can help you to determine which business opportunities do not conflict with the existing contract.

Understanding Oil and Gas Non-Competes

The purpose of a non-compete agreement is to protect the buyer’s post-sale interests by ensuring the seller will not directly compete with the business.  While this may seem restrictive, there are often many options for the seller in pursuing other ventures after closing the sale.  Work with an experienced broker to understand the terms of the non-compete agreement, from the geographic region to the term limits and niche specifications, and learn more about what options may be available to you today and in the future.