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Restrictive Covenants When Buying A Business

22nd May, 2013

Any buyer of a business will want to ensure that, once the purchase has been completed, the seller does not set up in competition with the buyer’s recently purchased business. The seller will retain valuable business know how and could use it to attempt to lure clients and employees to his new business.

Where there are no express restrictive covenants in the sale and purchase agreement that prevent the seller from setting up a new business in competition, the courts will imply certain restrictions on the seller, for example, the seller will not solicit the business of his former customers, use the business secrets of the sold business or hold himself out to be part of the sold business.

However, this protection for the buyer is limited. The buyer of a new business should always ensure that the sale and purchase agreement contains reasonable restrictive covenants that prevent the seller from soliciting existing customers or suppliers from the sold business, soliciting and employing existing employees from the sold business, disclosing or using the sold business’ trade secrets and competing generally with the sold business for a specified period within a specified area.

Restrictive covenants must be reasonable in the interests of the parties and in the public interest and go no further than is necessary to protect the buyer’s legitimate business interests, otherwise they may be unenforceable. In assessing what is reasonable, the parties should consider the duration of the restriction, its geographical reach and the scope of the activities which are covered by it.

The validity of a restrictive covenant will be determined as at the date at which the agreement containing it was entered into and the onus of showing that the covenant is reasonable lies on the party seeking to rely upon it.

For more information on this or any other area of company law, please contact Stuart Scott-Goldstone on 01244 405552 or email [email protected]

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