Business Sale Contract

Business Sale Contract

You can ask  online solicitors for advice on business sale contract using the question box on the front of our website or the following free legal advice guide may answer your questions.

The acquisition or sale of a business can be an exciting yet challenging time. How do you make sure that the sale or the purchase is in your best interests? The sale of a business is a lengthy and complex one that will involve a series of stages and some involved legal work which should be carried out by an experienced solicitor who wil draft a business sale contract for you.

Business sale

The main elements of a business sale pack are set out in four main documents; exclusivity, confidentiality, warranties and indemnities.

Business Sale Contract – Common Clause

A common clause in business sale agreements is a restraint of trade. These clauses are in place as a safeguard and they can be used in a variety of ways. For example, they could prevent a salesperson from encouraging clients to leave the business and join them, or it could place a restriction on the seller from launching their own similar business which would be in direct competition with any prospective buyer.

When restraints are incorporated into contracts there are three requirements that must exist;

  • The first of these is a valid interest that the interested party is trying to safeguard
  • Secondly, the restraint cannot be excessive or deemed unreasonable in relation to protecting the interests of a party
  • Lastly, the restraint cannot go against what is in the interest of the public

In the next sections of this guide we will look at each of the three areas in a little more detail.

Valid Interest

When drafting a contract for the sale of a business, an owner or employer may put in place a restriction that prevents a departing employee (who had obtained during the course of their employment trade secrets or influence over customers) from carrying out certain activities when they leave.

Employers may be concerned that the departing employee will either compete directly with the firm or use the skills they have acquired during the course of their employment to the detriment of the company they are leaving.

For a sale of business the buyer will want to ensure that their goodwill interest is safeguarded. Usually this relates to the existing customer base and relationships established by the business. When the sale is agreed, it is likely that the buyer will have paid a significant amount as part of the purchase price to take over the goodwill of the company.

As a result, the buyer will want reassurance from any seller that they will not set up in business in direct competition with them which could attract existing customers to join the new business.

Reasonable Restraint

When it comes to the second element of restraint, reasonableness should always be considered in relation to the interest that is being protected. For this, there are three aspects to factor in to any decision. The first of these is the geographical area, the second is the period of time and the third is the scope of the activities that are in question.

Let’s take the second example, geographical location to explain in more detail.

If a business sale completed in one city, and restriction clase was incorporated into the contract but this clause prevented the seller from setting up a similar business in the same country, this would be considered as unreasonable.

Any of these three elements where incorporated into a contract must be considered reasonable.

Public Interest

The final element that should be taken into consideration is public interest. However, there has been much debate over whether public interest restraint should even be included in a business contract. Even if a restraint fulfils the other conditions of reasonableness and legitimate interests, the contract may run into difficulties if it is not in the public interest.

This could occur in the instance of a scientist, doctor or artist whose work may be carried out to benefit of the public.

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