Restraint of trade/non-compete agreements are typically included in employment contracts to prevent employees from using insider knowledge to either create their own competing business or to benefit an external competitor in the industry should they choose to leave the company’s employment one day. But what role do they play in business sales? Let us explain…
When selling a business, a restraint of trade/non-compete agreement is crucial to give the buyer peace of mind when taking over the reins. How? Because these legal stipulations prohibit the seller from taking their years of knowledge, expertise, loyal customer base and employees and setting up a competing business just down the road once they have sold their business and received payment for it. If this were to happen, the result would be debilitating for the buyer, who has just spent a great deal of money on a business that is destined to struggle due to a new competitor (the previous owner). This is why a restraint of trade/non-compete clause is so critical when selling and buying a business.
What to expect in a restraint of trade clause?
For restraint of trade or non-compete clauses to be both acceptable and enforceable, they must first be seen to be reasonable. This includes the duration in which the clause is active; the radius in which it covers; non-solicitation components which cover whether the seller can employ current or past staff members of the business, as well as clients and suppliers; and much more. All these components have a large impact on the business after it is sold, so it is important to agree on the finer details of the restraint of trade/non-compete clause before settlement to ensure you (the buyer) are making a wise investment. These restraint clauses will form part of the legal contract of sale.
Examples of restraint of trade clauses
A small café may have a 2-year non-compete agreement where they cannot open a café within 5 kilometres of the existing business and cannot employ/poach/discuss any details on operations with staff, suppliers and patrons. A large-scale distribution business, however, may have a non-compete agreement that prohibits them from operating in the same business nation-wide for an extended period due to the larger investment and risk associated with the business purchase. When creating or discussing a restraint of trade agreement, it’s important to make it reasonable. Consider who the client base is and where they are located to ensure you (the buyer) are not asking unreasonable requests such as a 20-year restraint, nation-wide for a small corner store with no online capabilities. So in the event of a restraint being challenged in a court of law, the court will take into consideration all the above items and determine what is reasonable for that particular business.
Last but not least, we highly advise that all agreements and contracts be reviewed and discussed with your lawyer before signing on the dotted line. A restraint of trade/non-compete can be a highly important tool in business negotiations if done right.
If you are looking to buy a business or are hoping to sell yours in the near future, contact Core Business Brokers today, on (02) 9413 2977, or email Roy at [email protected]. Our industry experience and knowledge will help guide you through the process, making it a pleasant journey along the way.