Do You Know What Your Business Is Worth?
23rd September 2016

Selling Your Business: Understanding the Implications


Every business is different but usually there are some common features in every business. Frequently when you sell your business you are selling goodwill, which is the likelihood that customers will return to the business being sold and will continue to buy its goods and services. When you sell your business you have to step into the shoes of the buyer for a while to understand the implications for the buyer and nowhere is this more important is the issue of goodwill.

A buyer will want to protect the goodwill as much as possible; if the buyer does not then there is no point in the buyer buying the business. The traditional way of protecting goodwill is for the buyer to require, as a condition of the sale, the seller to sign restrictive covenants promising not to compete with the business that the seller is selling. These may include agreements not to serve existing customers or clients for a specified period, not to hire employees from the business that has been sold, and not to compete in specific spheres of the business.

This is where the complexity of the law enters into the transaction. Traditionally a covenant (which is an enforceable promise) not to compete is against public policy and will only be enforced by the courts if it is reasonable. There are volumes of case law on what is reasonable and what is not reasonable, so the seller and buyer must tread a careful path when the contract is prepared. The seller wants to ensure that he or she is not unreasonably restricted in their future affairs whereas the buyer wants to protect the goodwill of the business that he or she is buying. This means that the wording of the restrictive covenants can be very complicated.

At one time a person selling his or her business did so intending to retire, and that still often remains the case but the path to retirement is not always strewn with roses and intentions change, especially in these days when older people are fitter, more active and more energetic than they were in past times.

The whole field of what is reasonable and whether restrictive covenants can be enforced is very important to those buying and selling a business. And buyers and sellers must take good legal advice in order to understand what is possible and what is desirable.

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