Restraining a vendor following your purchase of their business

We recently met a purchaser who had bought a music store. The previous owner had engaged in music promotion when he owned the music store and had occasionally put on in-store concerts.

During the business sale negotiations, the vendor threatened not to go through with the sale if the purchase agreement included a restraint of trade that restricted him from putting on musical performances following the sale. As the purchaser wanted to proceed with the sale he agreed to drop any restraint of trade as part of the business purchase.

Unfortunately, this meant that after the sale the vendor could not only host musical performances, he could also establish a new music store in the same street, which he did three months after the business sale!

Given that the purchaser had agreed to waive any restraint of trade, there was little that the purchaser could do to stop the vendor.

A restraint of trade can help you restrict a business owner from operating a similar business to the business that they have sold to you, during a defined period, thus ensuring you can keep the business humming the way you want.

While a full restraint of trade restricting all similar business activity is ideal, they are not always easy to negotiate.

The above example illustrates the value that even a partial restraint can provide when protecting new business owners from competition (at least from the vendor!) following their purchase of a business.

Partial restraints of trade can be agreed that allow a vendor to engage in certain agreed activities of their prior business, but that prevent them from setting up in direct competition with the purchaser. This can be an important option if the seller might otherwise not agree to sell their business to you.

Unfortunately, many business purchasers do not know that a partial restraint of trade is an option. As illustrated in the case above, foregoing any restraint of trade in order to secure the purchase can have significant consequences. 

If the purchaser had taken appropriate advice during the sale negotiations he might have been able to include a partial restraint of trade clause to carve-out the vendor’s ability to put on musical performances in the same area, but prevented him from opening a new music store within a reasonable area in direct competition with the purchaser.   

This case illustrates again the importance of obtaining professional advice prior to, or while, negotiating a business purchase.