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When selling your business, you will almost certainly be thinking about your plans for after the sale. Especially if you have invested time and energy in your business, you may want a rest period. However, being restricted by the restraint of trade you signed up for when selling your business can be frustrating. A restraint of trade is when you agree to not compete with a business you are selling. A restraint of trade can stipulate a period of time, certain geographic areas, or an agreement not to try to lure away clients or employees.

This article sets out when restraints of trade are binding when selling a business, how the negotiation process typically works in these scenarios, and some tips to consider when looking to sell your business.

When Restraints of Trade Are Binding

In general, restraints of trade clauses that you agree to are binding. For restraints agreed as part of a business sale, as well as in an employment agreement, this rings equally true. However, there are some circumstances where restraint is unenforceable. In other words, restraints are so unreasonable that a business cannot enforce the restraint. Completely unreasonable restraints that prohibit someone from having a career or job after leaving a business may not be binding.

The Employment Relations Authority is the body that usually decides whether a restraint of trade is enforceable or not. There is no set rule for when a restraint is reasonable or unreasonable. In general, the Authority will look at:

  • how long the restraint is for (the longer the restraint, the less reasonable it is); 
  • the geographic restriction of the restraint (the bigger the area, the less reasonable);
  • whether there is an important business need for the restraint, such as to protect valuable or commercially sensitive information; and 
  • what the person’s position in the business in question was prior to leaving. 

Professional advice from a lawyer is useful if you are concerned about restraint enforceability.

How Restraints of Trade Work When Selling Businesses

Restraint of trade clauses are common during business sales. The business purchaser will usually look for confidence that the person selling the business will not undermine them. This could be by immediately competing or undermining future operations in some way. As such, it is likely you will have to agree to a restraint of some sort. Usually, this is a point of negotiation between the vendor and the purchaser. 

If you receive fair compensation for the restraint in the sale, it is unlikely a court will rule it unreasonable.

Tips Around Restraints of Trade When Selling Your Business

In negotiations, restraints should be taken extremely seriously. One mistake is focusing on the sale price rather than what you will do following the sale. However, if a restraint prevents you from working in your industry for a long period, this is an issue. An employment lawyer or other specialist can provide advice on what a reasonable restraint would be.

Key Takeaways

You will be bound by the restraints of trade you negotiate with the purchaser and details in the formal sale and purchase agreement if you are selling your New Zealand business. An exception applies if the restraint is unreasonable. Still, you should not rely on this when agreeing to a restraint, as it will be held reasonable in most cases. You should operate on that assumption when thinking about selling your business and considering your future prospects. 

If you want to know more about restraints of trade and their effect when selling a business, contact LegalVision’s commercial lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

Are restraints of trade always binding in a sale and purchase agreement?

Yes, you will be bound by whatever restraint of trade you have agreed to in a sale agreement or employment agreement. The main exception is if the restraint is unreasonable, in which case it cannot be legally enforced against you. 

When is a restraint of trade unreasonable?

Many factors go into whether a restraint of trade will be held by a court or the Employment Relations Authority to be unreasonable (and therefore unenforceable). These include the length of the restraint (more than three or especially six months means the restraint is unusually severe), the geographic boundaries of the restraint, what your position in the business was and whether the business has a serious business interest to protect with the restraint.

What restraints of trade are usually included in a sale and purchase agreement?

There is no default restraint of trade in a sale and purchase agreement – it will be negotiated between the parties, and standards differ from industry to industry. As the person selling an existing business, you may want to think about your future employment prospects in the industry if agreeing to a restraint of trade.

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