HOST: Something that all small-businesspeople should be informed about is the subject of non-compete clauses. These contractual legal restrictions exist in many businesses, and they're the subject this week for legal expert John Dolan.

JOHN DOLAN (Legal Consultant): The covenant not to compete. This is something that comes up a lot of times in a small business situation. One way it can come up is you buy a business. You go to someone's business--let's say they have the greatest hamburger stand in town, and I buy your hamburger stand from you, and you agree with me that you won't open up another hamburger stand anywhere within 50 miles. If part of our agreement is you get certain compensation, specific compensation, so many dollars for this agreement not to compete, the courts will enforce those kinds of agreements, because it makes sense, doesn't it? If I'm buying your business, I want to know that you're not going to put me out of business by opening up next door. And so those kinds of non-compete clauses are routinely enforced.

But here's how it comes up, and it can be significant for a small-business owner. Let's say you work at Megacorporation, and you've decided to go out and open up your own company. And in your original employment contract with Megacorporation, it says you agree that you will never go out and compete with Megacorporation producing the products that they produce, or similar products, in the area. You go out and open up a company. Most of the time the courts will not enforce that kind of a non-compete clause, and the reason is pretty simple. If you're given specific compensation, and you voluntarily agree not to do something, not to compete, the courts will enforce that. But if it's just part of the contract, and there's no specific compensation, the courts have generally found that's an unfair clause to enforce, because it can prevent someone from earning a living, and the courts don't want to do that.

HOST: So if I, as a small-business owner, want to keep someone from competing against me, I need to offer compensation.

JOHN: Yes. Specifically within your contractual agreement to purchase the business, you want to identify a portion of the compensation for the purchase of the business that is allocated to the agreement not to compete. So it's $10,000 as part of the purchase of this business is allocated to your agreement that you will not compete with me within 50 miles for five years. Once there is an exchange of consideration, the courts are happy to enforce that kind of agreement.