Purchase of Business – Restraint of Trade
If you are considering purchasing a business, one of the important factors you will need to consider is the type of restraint you will place on the seller from setting up a competing business with you for a period of time.
Restraints are allowable both as to time and location.
What you as a purchaser need to be concerned with is all of the parties to the contract and against whom is the restraint is made.
Many businesses are held in the name of a Trust or a Company and accordingly, steps have to be taken to join the people behind the Company or the Trust and who have the client contacts to make certain that they are also included in the restraint.
If they are not, the restraint may not be worth the paper it is written on and your purchase of the business could turn out to be worth substantially less than what you have paid for it.
An aspect of the restraint is also what is the person restrained from doing.
You cannot stop them from undertaking a living but you can certainly make the restraint wide enough that they cannot act for existing clients of the business. There is a difference between restraining them from actively seeking out old clients to that where the client seeks them out.
To properly protect yourself you would need a restraint whereby they are not allowed to act for old clients during that period of time. If they want to take any clients with them then that should be negotiated in the Contract with an obvious reduction in the purchase price.
In the circumstances, if you have clients looking at purchasing businesses make certain that the appropriate advice is obtained before the contract is signed and not afterward when it may be too late.
If you need advice in regards contract and restraint of trade, give us a call on 1300 HATZIS (1300 428 947)