With all the time, effort and money involved in purchasing a business, you want to be sure that your acquisition, particularly its goodwill component, is protected from the exiting owner moving forward. This can be achieved through a strong ‘restraint of trade’ in your sale of business contract.
The purpose of this safeguard is to protect you, the purchaser, by preventing or otherwise placing conditions/restrictions on the Seller in its involvement, ownership or operation of a competing business. Ultimately, limitations will be placed on the Seller’s ability to conduct a similar or same business within a certain geographical area, for a period of time.
A robust restraint should also include provisions to prevent the Seller from poaching key staff members and customers of your business, basically stopping interference with your conduct of the business. Inclusion of any key members or representatives of the Seller (such as director if the Seller is a company) should also be considered, as a failure to do so could ‘water-down’ the desired effect or protection of the restraint.
It is usually best for the restraint to be ‘cascading’, meaning that the restraint areas will shorten, and the restraint periods will decrease over time. As time goes on and the goodwill in the business is secured, there is no issue with the Seller progressively being allowed closer to your business.
The requirements and terms of any restraint are important and a reason why your solicitor’s advice is needed, as the restraint must be deemed to be reasonable. If the matter were to ever be challenged, the Court will consider various factors in making this determination, including but not limited to:
- location of the business;
- the parties involved;
- duration of the period;
- area which the restraint applies; and
- scope of the restraint and the restricted activities.
If the restraint were found to be too broad, excessive or otherwise unreasonable, it may become inoperative and as such, expose you, the purchaser, to future risk.
It is key to the success of your business that the goodwill be preserved and that the Seller’s actions in relation to the business, its staff and its customers be controlled. However, it is also important to remember that the restraint must be fair and must not be anti-competitive or unnecessarily restrictive on the Seller.
– Nicholas Galle, Legal Director at AP Group