When to Apply Restrictions and Prohibitions in the Business Deal - VR Business Sales Blog

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Thursday, May 7, 2009

When to Apply Restrictions and Prohibitions in the Business Deal

JoAnn Lombardi
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When negotiating the sale of a business, it’s not uncommon for both the buyer and seller to miss putting much thought into the post-close conditions and terms. Obviously, both parties want to protect themselves against potential harm that either could inflict. However, this topic can be overlooked when so much time is spent on the actual transaction.  
The fact is the buyer is going to have concerns about the seller possibly taking away the goodwill that they’ve created. The seller will want to know what activities that they will be able to engage in without the threat of legal action.  
Depending upon the situation and how the business is set up, you may want to consider including such terms as express provisions and/or common-law principles into the contract. These have been established by the courts over the years that have recognized both as the two bases for imposing prohibitions or restrictions on the activities of the seller.  
The common-law bar against solicitation arises only if the acquirer is buying the goodwill of the seller’s company. In its most basic form, goodwill is the customer relations that the business has built up and maintained.  
Understandably, the seller shouldn’t be allowed to take back the goodwill it sold by going after those established customers. However, if the goodwill is not part of the sale, the seller is free to solicit and otherwise compete unless the contract of the sale includes common-law principles restricting such activities.  
Also note that the common-law rule only applies to solicitation of customers by the seller. It doesn’t prohibit the seller from competing with the business it sold.  
“Competition” versus “Solicitation”
Be careful when differentiating permissible competing from improper solicitation because it can become both difficult and vague.  
  • “Competition” means engaging in the same business;
  •  “Solicitation” refers to actively seeking to do business with particular customers.  
Therefore, under the common-law rule, a seller may never contact a customer of its former company to solicit. However, if that customer comes to the seller unsolicited, they are permitted to compete from accepting their business.  
Express Provisions in the Sales Contract
Since the common-law rule only applies to solicitation, restraints on the seller’s post-sale competition can only be achieved by including express provisions in the contract. Just remember that these kinds of provisions will not be accorded the same broad scope as common-law principles.  
These will only be enforced for a specific amount time in a select geographic area as deemed by the court. In New York, for example, the courts will “blue-line” the contractual provision – enforce for only a specific amount of time and area that the court deems reasonable. Some state courts will throw out the provision entirely if they find the terms to be unreasonable.  
Course of Action
Determining if restraint conditions should be implemented in the contract depends entirely on how much emphasis you want to place on a business’ goodwill. In some instances, the seller should suggest that the contract include a provision barring its solicitation of customers for a stated period of time. This may look to be self imposed but it frees themselves of common-law bar against solicitation for an unlimited time and area that is recognized in some states.  
Regardless, we here at VR can assist you in drafting Non-Competition Agreements as these kinds of laws vary from state. In some cases, contractual restraints may be void by statute; therefore, we will give you all the insight and factual information to go forward after the deal has been done.


Response to: When to Apply Restrictions and Prohibitions in the Business Deal
Henry Gardiner says
Reciprocation is essential for both parties. Whether you're the buyer or seller, you have to disclose your goals and interests so each side can better understand how they might not only meet each others needs but can benefit. It is best that this starts at the beginning of the talks by setting the framework of a cooperative mood that will increase mutual interaction.

Response to: When to Apply Restrictions and Prohibitions in the Business Deal
Heather Cooper says
A lot of businesses whether for their employees or with the buying party will include a non-compete agreement, where either you can't start a company of the same kind within a certain mile radius, over a certain time period or simply can no longer sell the same products.

Response to: When to Apply Restrictions and Prohibitions in the Business Deal
Mary Provose says
Make sure that your non-compete agreement is clear on intent, especially with intellectual property. If an owner decides to sell, then he or she has to be sure to include in the clause that they can take certain assets with them if they have no intention of leaving everything to the new owner.

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