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Business Sales – Restrictive Covenants

Commercial

When you are selling a business the buyer will often request that the sale contract includes a restrictive covenant against the seller that restricts the actions of the seller. The Buyer will be paying a value for the goodwill of the business and will want to ensure that this is not affected by the Seller opening a competing business in the local area or approaching the staff of the business or the current customers of the business.

The common types of restrictions include:-

1. not to compete – this prevents the seller from setting up or being involved with a competing business these are usually enforceable;

2. Not to poach customers – these usually refer to customers of the business over a period of time prior to the sale but in a small business sale it is not unheard of for there to be an outright bar on approaching any previous customers;

3. Not to approach staff – In larger business sales this may be aimed at the managers within the business, but in a small business it could be reasonable to restrict poaching of any of the members of staff;

In respect of time scales the shorter the period the more likely it is that the courts will view the restrictive covenant as reasonable but this needs to be balanced with adequate protection for the buyer. There is no clear guidance on this issue but 2 years appears to be a common time scale applied in contracts.

The other factor to consider if the geographical reach of the restrictive covenant. What is reasonable will depend on the nature of the business, where the business is based etc.

If you are buying or selling a business I strongly advise you to seek independent legal advice. Please feel free to contact me on 01623 448302 or climb@fidler.co.uk as I would be happy to provide you with a competitive quote.

Christie Limb

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