Restrictions in a sale of a business

Restrictions on a sale of a business

When buying any business the purchaser will be concerned that once the sale is concluded the seller will set up a competitive business which will dampen the success of the buyer’s business. Why go to all the trouble of buying a target business when the seller can start up a fresh and new competing business?

The Share Purchase Agreement (SPA) must deal with these restrictions. While you can rely on a court to imply various terms it is far from ideal.Â

Implied or Express Terms

Ideally the SPA will expressly (by way of covenants) deal with these restrictions. These terms must be reasonable and must not go any further than is necessary to protect the business interests of the buyer but in the absence of these express terms the court will imply certain restrictions namely preventing the seller from:-

a. making out that it is still carrying on the business

b. use the business secrets of the business

c. seeking to target old customers.Â

But it is essential that the SPA deals with the restrictions in an express way, namely:-

a. non solicitation of customers and b. non solicitation of employees. Both these express terms need to be reasonable in terms of both geography and the scope of the activities involved.

c. period of time where the seller is prevented from competing for a period of time. This period of time can be as long as three years.

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