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Any buyer of a business will want to ensure that, having paid good money for the business, the seller is not going to then open up next door. If you buy a business without a contract then the courts will generally impose very basic restrictions on the seller which are normally centred around poaching customers and using business information but these implied covenants are unlikely to go as far as a buyer would like.

Because of the limited protection provided by implied covenants, buyers will want to see further, tighter restrictive covenants in the contract which prevent the seller from:
  • poaching existing customers or suppliers
  • employing existing employees
  • competing generally with the business,
at least for the time it takes a buyer to find their feet and impose their stamp on the business.

It is fair to say that clauses in a contract designed to prevent this are not held in high regard by courts and must, if they are to be of use to a buyer, be ‘reasonable and go not further than is necessary to protect the buyer’s legitimate business interest’. In assessing what is reasonable, such criteria as
  • the length of the covenant
  • the geographical scope of the covenant; and
  • the type of business
will all be considered but generally covenants can be classed in one of two categories:-
  • those that protect the buyer (which will be legitimate)
  • those that restrict the sellers’ freedom to trade (which will generally be struck out).
Drafting restrictive covenants is a fine art and the line between ‘reasonable’ and ‘unreasonable’ is not an easy one to draw. For this reason, restrictive covenants whether in a share purchase or asset purchase agreement must be tailored exactly to the business being sold. For example, whilst it might be reasonable for a pharmaceutical company holding UK-wide licences to prevent its seller from operating anywhere in the UK, it would be unreasonable for a solicitor’s practice to request a similar covenant. The trick is to have a covenant that protects you but goes no further and to draft it in such a way that if any part of it is found to be unfair it can be removed without removing the whole clause.

For more information, please contact David Heys at Lawson-West Commercial on 0116 212 1000.