When you sell your business your buyer is likely to ask you to agree restrictions concerning your future business operations. Even without a contract the courts will generally impose very basic restrictions on the seller which are normally centred around poaching customers and using business information.
Because of the limited value of these implied covenants, buyers are likely to require more security, in particular in relation to:
- poaching existing customers or suppliers
- employing existing employees
- competing generally with 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
Drafting restrictive covenants is a fine art and the line between ‘reasonable’ and ‘unreasonable’ is not an easy one to draw. The consequences for a seller of breaching a covenant once given (assuming the covenant was reasonable) can be severe. It would entitle your buyer to seek an order from the court preventing you from continuing the breach and, if your buyer can prove loss, they can also sue you for damages which could be higher than the price you got for the business.
For this reason, restrictive covenants should be carefully negotiated to ensure they are no wider than you are able to give.
Download our Guide to Selling your Business here.