Protect Business Growth from Direct Attack by an Unsuspected Enemy

When handed the keys and security codes to its new business premises, a business buyer may be excused for feeling like a short holiday to Bali even before the hard work has actually begun. Let’s not kid ourselves; the process of buying a business is not easy. Especially when a buyer is taking every steps to protect their new baby: getting the legals right, undertaking a thorough due diligence and getting the three most important ducks in a row to hit the ground running, i.e. customers, workers and suppliers. These relationships are the foundation for future growth. They are not easy to establish quickly, let alone when the business is under direct attack. This direct attack is not by one of the many business competitors discovered in due diligence or a new entry into the market. This is a direct attack by an attacker who knows the business intimately; who knows almost every customer of the business; every worker intimately and every supplier well. They know the past financials of the business and its strengths and weaknesses. I am talking about a direct attack from the previous owner of the business.

How can this be possible? The seller was paid well for the business. They said they wanted to retire, travel overseas, spend more time with family and that they hated the industry, never wanting anything to do with it again! Whatever the seller’s motivation to sell, which is often communicated to a buyer, this can often change and sometimes quickly. The seller retires and then gets itchy feet. Can’t stand it at home. Tries to get into a different industry, but finds it too hard. The business sold is all they know. They don’t want to relocate so as not to compete. They end up starting a new business. In one recent case, right next door to the business they sold. They start calling their old friends (who just happen to be the customers, workers and suppliers of the new business) and before long, instead of growing the new business, the buyer is struggling to stay afloat. Then there are bad sellers who lie about their intentions and had always planned to re-establish a competing business!

This is no exaggeration. Based on my legal practice alone, I expect that on a daily basis there are people walking into their lawyer’s offices asking them to advise on how they can recommence their business in competition with the business they had just sold. Buyers must protect themselves against this; otherwise, they may lose their business.

One easy form of protection is a thorough “restraint of trade” or “non-compete” provision in the business sale contract. Such a provision must not only provide that the seller cannot compete with the buyer after settlement, but that the buyer cannot do so indirectly through another company, family or friend. Also, whilst most standard business sale contracts provide that the seller cannot open another competing business within an agreed radius of the business, for an agreed number of years (e.g. 20 kilometres for 3 years), this is not enough. At the very least, every restraint should provide that the seller cannot deal with the customers, workers and suppliers of the business, no matter where they are located.

For such provisions to be legal, there is some complexity. One is that they must be reasonable. Finding the right balance can be difficult. Given the risk involved in getting them wrong, buyers should get the advice and assistance of their lawyers to get them right. Not doing so will not only jeopardise the growth of the business, but the future existence of the business.

You may also like:

1. A Practical Legal Guide to Buying a Business
2. Restraint Clause in Business Sales
3. The Strategic Side of Restraint of Trade