A sale of business contract will generally include a restraint of trade clause that stops the vendor from becoming a competitor to the business for a certain period of time after settlement and from carrying on business within a certain distance of the business premises.
This needs to be negotiated, and the appropriate time and distance will vary according to the particular business. Typically, the object is to prevent the vendor from accepting a sale price and then (setting up business down the road) taking back customers. However, courts can be reluctant to enforce these clauses and to be enforceable by a court, they must be reasonable in all the circumstances.
For example, if a purchaser buys a convenience store for $20,000 and insists on a restraint preventing the vendor from operating any retail outlet in all of Australia for 30 years, it will not be enforced by the courts (even if it is in writing and signed).
Where the vendor is a company, the restraint of trade should be extended to directors, shareholders and even key personnel of the vendor company. Of course, a key employee who is not receiving any of the sales proceeds is unlikely to agree to enter any such agreement.
Further, a purchaser may consider requiring a “non-poaching” clause prohibiting the vendor from poaching staff (even if the vendor’s new business is outside the radial limitation).
For clarity, courts are often reluctant to enforce non-competition clauses or agreements, so purchasers do need to be wary and cautious as regards their expectations.
For more information on restraint of trade and other sale of business enquiries, contact our office on 03 9450 9400.
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