Q: I am considering buying a business as a going concern. I understand that the seller has a loyal client base and I hope to retain it by buying him out. Is there anything I can do to prevent him approaching his former clients and employees, or setting up a similar business in the area?
A: This is a common situation and you should make full enquiries of the Seller as to what are their intentions following any sale of the business. If you agree to purchase the business, you should have a written agreement drawn up by solicitors which deals with all aspects of the business, including what will happen to any equipment, stock, employees, liabilities and so forth.
In order to prevent the Seller from competing with you after the business is sold, the sale and purchase agreement should contain 'restrictive covenants' which seek to prevent the seller from doing certain things after the sale, including setting up business in competition with you. The agreement should also contain appropriate covenants to prevent the seller from approaching existing customers or suppliers of the business, taking the business's employees with them or approaching them later with offers of work, using or sharing trade secrets and generally competing with the business. These restrictive covenants are usually limited in both geographical area and time, as this will help to ensure it is enforceable.
If a covenant is to be relied upon, it must be seen by the courts as reasonable in all aspects, in the interests of both parties and necessary to protect the buyer's interest. The covenant may otherwise be ruled unreasonable by the Courts.
You should always take legal advice before purchasing a business to ensure that the documentation is accurate and enforceable, and contains all of the provisions which are required to protect your interests and to ensure that you get what you are paying for.