Protect the Business With Restraint of Trades.
You want to buy a business but you don’t want to get ripped off. Ever wondered how to protect yourself and the business after you have purchased it? There is a legal way to avoid getting ripped off when you buy a business. This legal protection is crucial in business transactions to safeguard your interests as a buyer. It will stop the owner of the business starting a competing business just days after they have sold their business to you. The restraint of trade is the one clause you should never overlook when buying a new business.
With nearly 20 years as a business broker, I've seen how trade restraints protect buyers, but what exactly is a restraint of trade, and why is it so crucial for a buyer to have one? It is the best legal way to protect yourself from being taken advantage of in business a business purchase. This is the story of a business buyer named John and how he used more than one trade restraint to ensure he was safeguarded. John didn’t want to risk getting ripped-off and used this to protect his interests and help his newly purchased business thrive.
But what exactly is a restraint of trade? In the context of a business sale it refers to a contractual clauses that restrict the seller's ability do things that could harm the business. These clauses are typically designed to protect the buyer. But how?
John had his sights set on "The Fishing Store," a well-established fishing and tackle retail store located in a part of the city near the boat ramps. The store had a loyal customer base and a solid reputation for quality products. The owner, an elderly guy named Mr. Collins, was looking to retire and had put the business up for sale. John saw great potential in expanding the store's offerings and leveraging its strong brand.
As John moved into the negotiations, he realized the importance of safeguarding his investment. He had heard horror stories of buyers who had seen their newly acquired businesses crumble because the sellers had set up competing ventures nearby, poaching customers and employees. John knew he needed to protect himself from such risks. John wanted to include a "restraint of trade" clause in the purchase agreement. This clause would prevent Mr. Collins from opening a similar tackle business within the City for the next three years. Additionally, John wanted non-solicitation and confidentiality agreements to ensure Mr. Collins could not poach employees or disclose sensitive business information after the sale.
However, Mr. Collins was initially resistant. He felt that such restrictions were overly harsh and could hinder his ability to engage in future business activities if he wanted to. The negotiations grew tense, with both parties holding firm on their positions. John knew he couldn't compromise on these protections, but he also understood the importance of reaching a fair agreement. I suggested that Mr. Collins took advice from his lawyer who explained the different types of trade restraints and their significance. He highlighted the importance of non-compete clauses, which prevent the seller from starting or engaging in a competing business within a certain geographical area and for a specified period of time.
John had also asked for a non-solicitation clause. The business had a strong boat charter side and this clause would stop the seller from stealing the business’s clients, customers, or employees. This ensures that the seller does not poach key relationships and personnel that are vital to the continued success of the business being sold.
Mr Collin’s lawyer outlined the legal considerations that play a significant role in the enforceability of these restraints. Courts typically scrutinize restraints of trade for reasonableness in terms of duration, geographical scope, and the nature of the restricted activities. Overly broad or unreasonable restraints may be deemed unenforceable. For example, if the seller of a bakery was prevented from opening another bakery in another part of the country, that might be unenforceable. However, if the bakery was a commercial operation selling goods across the country, a nationwide restraint could be considered fair. Both parties knew that the enforceability of these clauses can vary significantly depending on judicial interpretations, so they had to agree on something that was fair to both sides and was legally enforceable.
After much discussion, they finally had a draft of a restraint of trade clause that balanced both parties' interests, including a reasonable geographical scope and time frame. Included exceptions that allowed Mr. Collins to pursue other business ventures that wouldn't directly compete with The Fishing Store. Mr. Collins, seeing the reasonableness of the revised terms and John's genuine passion for the business, agreed to the conditions. The final agreement included a non-compete clause preventing Mr. Collins from opening a similar store within a 10-kilometer radius for three years, a non-solicitation clause, and a confidentiality agreement.
With the purchase finalized, John took over The Fishing Store and immediately implemented his growth strategies. The store flourished under his leadership, expanding its product range and customer base. The restraint of trade clause proved invaluable, as it prevented any immediate competition from Mr. Collins and allowed John to build on the strong foundation he had acquired.
Its not all the buyer’s way, though. In the context of negotiations, the presence and terms of restraint of trade clauses can significantly impact the valuation of the business. Stricter restraints can potentially lead to a higher sale price, as they offer greater protection for the buyer’s investment. Both parties must carefully negotiate the terms to ensure they are fair and enforceable while protecting the buyer’s interests and considering the seller's future business opportunities. This is where advice from a good contracts lawyer is invaluable.
Peter Nola is an Auckland based business broker, author and YouTuber with 20 years’ experience and over $100m of businesses sold, helping New Zealand business owners to buy and sell businesses.
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