How should I evaluate whether to agree to contractual terms that could restrict or limit the conduct of the company's business (e.g., exclusivities or a noncompete)?

When entering into contracts with third parties, it’s important to carefully consider any terms that could prevent your company from freely operating and selling its business. These business restrictions can be imposed by many different types of contract provisions, but some common examples include exclusivity commitments, noncompete commitments, most favored pricing commitments and granting a counterparty the first right to acquire your company. Business restrictions may appear in a counterparty’s forms (including in the fine print) or be expressly proposed during contract negotiations, so it’s important to keep on the lookout for these terms when reviewing and negotiating commercial deals.

In addition to contractually prohibiting your company from operating in certain ways, business restrictions may be closely scrutinized during due diligence in connection with fundraises, M&A deals and IPOs, so it’s important to thoughtfully assess whether it’s appropriate for your company to agree to a business restriction in a particular deal. Some key issues to consider when making that assessment may include:

• what economic value your company is going to obtain in exchange for the commitment (e.g., guaranteed fees or equity) and whether that value outweighs the economic opportunities foreclosed by the commitment;
• how to appropriately scope the commitment (e.g., making it specific to a geographic region, product line, market, or period of time); and
• under what circumstances the commitment should cease to apply (e.g., if your company is sold or if minimum economic consideration isn’t collected over a specific period of time).

If you have any questions about business restrictions in your contracts, you should speak with your attorney.