A buyer paying for goodwill is paying for customer relationships, reputation, staff and market position — all of which can leave with the seller. A seller who sells on Friday and opens a competing business on Monday has sold considerably less than the buyer paid for. Covenants are how that value is protected.
The Four Covenants, and How Enforceability Is Judged
Usually four, and each deserves separate attention rather than acceptance as a block. Non-competition — not carrying on a competing business, within a defined area, for a defined period. Non-solicitation of customers — not approaching or dealing with customers of the business sold. Non-solicitation of employees — not poaching the staff who transferred with it. And confidentiality, which as to genuine trade secrets frequently continues indefinitely. As to enforceability, the broad principle is that a restraint must go no further than is reasonably necessary to protect a legitimate interest. On a business sale the buyer plainly has such an interest in the goodwill they paid for, so the question becomes whether the particular restraint is reasonable in duration, geographic extent and range of activities, judged against that interest. Covenants given by a seller on a sale are generally regarded more favourably than employment covenants, because the parties dealt at arm’s length and the seller was paid for the goodwill. It remains a question of degree on the facts rather than a formula, and it is one of the areas where general assumptions are least reliable.
Why Buyers Should Draft Narrowly, and What Sellers Should Watch
The temptation for a buyer is to take the widest possible restriction — every activity, the whole country, an indefinite period — on the instinct that more is safer. The opposite is true. A restraint going beyond what is reasonably necessary risks being unenforceable, and a buyer holding an unenforceable covenant has no protection whatever at the moment they need it. A narrow, carefully drawn covenant that genuinely protects the goodwill acquired is worth considerably more than a sweeping one that may be worth nothing when tested. Buyers should draft for enforceability rather than for ambition. Sellers, meanwhile, should watch three things. Scope creep — covenants drafted so broadly that they prevent working in your own industry at all, which for someone selling at fifty rather than retiring is a constraint on the rest of a working life. Duration, which should be proportionate to how long the goodwill genuinely needs protection. And the interaction with any consultancy or employment arrangement after completion: a seller staying on for a handover may find the covenant period runs from the end of that engagement rather than from completion, which can extend the restriction substantially. If you intend to work again, say so early — negotiating the covenant is far easier than living with it.
Planning What You Will Do Next?
Say so before the covenants are drafted rather than after. A seller who intends to keep working in the sector needs the restriction shaped around that, and it is a straightforward negotiation at the right moment.
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