Why sale-of-business restraints are different
A restraint given by a seller of a business is usually analysed in the context of protecting the goodwill the buyer has purchased. That context differs from an employment restraint because the seller has received consideration for transferring the business and its goodwill.
The NSW statutory framework
NSW has the Restraints of Trade Act 1976. In broad terms, the statutory framework allows a restraint to be valid to the extent it is not against public policy, and gives the court a capacity to uphold a restraint to an extent that is reasonable in the circumstances. That does not mean any clause will be enforced simply because it contains cascading alternatives.
What legitimate interest is being protected?
The contract should identify the commercial interest: customer connections, confidential information, supplier relationships, workforce stability or goodwill attached to a particular location or market. A restraint that extends far beyond the goodwill acquired can be harder to justify.
Duration and geography
The appropriate period and area depend on the nature of the business. A local professional practice may justify a different geographic scope from an online national business. The drafting should reflect where customers actually come from and how quickly goodwill can be re-established.
Restricted activities
“Compete with the business” can be too vague or too broad. A better clause identifies the business activities the seller must not carry on and may separately deal with soliciting customers, employees or suppliers.
Cascading restraints
Sale agreements often use multiple alternative periods, areas and activities. A cascading structure can assist enforceability but should still be rational. A long matrix of unrealistic alternatives can create uncertainty and negotiation friction.
Restraints should align with the price and warranties
If the buyer is paying a substantial amount for goodwill, the restraint should be treated as part of the commercial bargain. Conversely, the seller should ensure the clause does not unintentionally prevent unrelated future work or investment.
What a seller should negotiate
- Precisely define the restricted business.
- Limit geography to the market actually transferred.
- Separate non-compete from non-solicitation obligations.
- Carve out passive investments where appropriate.
- Check whether the seller’s ongoing employment or consultancy creates overlapping restraints.
- Ensure the clause applies for a commercially defensible period.