Congratulations, you’ve found a buyer for your business and deserve a glass of champagne. But amongst the excitement, and the preparations for the sale, you will need to consider what is required after completion.
Following my recent article about selling a privately owned business, it’s now time to take a look at specific restrictions that may apply to you, your fellow shareholders and other owners, as well as your employees, after the sale of your business.
Depending on the continuing involvement of key people, the buyer of your business may require competition and similar restrictions on them to be included in the Sale Agreement and other documents such as Employment Agreements and a Shareholders Agreement.
Often these restrictions need to be carefully drafted and negotiated to ensure that the buyer has the protection necessary for the ongoing operation of the business but the sellers and others have reasonable flexibility to continue to work or invest in other businesses. These restrictions may restrict the income and opportunities of you and your colleagues for several years.
The Share Sale Agreement, Asset Sale Agreement or Business Sale Agreement will often contain competition and similar restrictions on the sellers. Typically they might include requirements not to:
- compete with the business being sold
- take employees from the business
- take customers from the business, or
- interfere with suppliers of the business.
These restrictions could be for several years and relate to your current and previous employees, customers and suppliers. Five years after completion of the sale is the longest duration of these restrictions that I typically see in Australia. Australian courts can be reluctant to enforce restrictions of this kind, especially for long periods. Shorter periods can be negotiated including on the grounds of reasonableness and enforceability.
The geographic scope of the restrictions is also important. For example, if the business only operates in a particular city, state or territory of Australia, then it may be reasonable to limit the operation of some or all of the restrictions to that city, state or territory. Of course, buyers may ask for more especially if they plan to expand the business into other areas.
In addition, while most of you have no intention of competing with or damaging the business that you have worked so hard for, often buyer’s lawyers draft restrictions too broadly so that their scope is wider than the nature of your business.
Accordingly, you may need to review, negotiate and document the relevant provisions carefully.
These issues often get finalised last in the Sale Agreement but, if they are important to you, you may wish to flag your concerns earlier.
Often buyers will allow employees of businesses to continue to be employed on the same terms. However, in some instances, such as for critical employees or staff without satisfactory employment arrangements, new employment agreements may be required by the buyer to take effect on completion of the sale.
As a practical tip, it is often preferable for sellers to ensure that the terms of any new employment agreements are agreed with, and signed by, the relevant staff at or before the time when the Sale Agreement is signed (even if they don’t take effect until completion). You would not want employees to hold up the sale or risk them leaving the business, especially after you have told your customers and suppliers about the sale (if you need to do so before completion).
These new employment agreements often include competition and other restrictions which are similar in scope to those in a Sale Agreement (except for their duration).
Australian courts are reluctant to enforce restrictions against employees unless they have significant customer or staff connections so they rarely apply for more than a year after termination of the employment. Depending on the role of the employees and other circumstances, shorter periods and narrower scopes of restrictions would be more typical.
For partial business sales by owners or if equity is being issued to staff, Shareholders Agreements are often required to govern the affairs of the business and often contain similar competition and other restrictions. These restrictions will typically apply during the period of your (continuing) equity ownership and for a period of up to, say, three years after that ownership or relevant employment ceases.
You and your relevant colleagues should give careful consideration to these provisions. If your partial ownership or equity interest continues indefinitely, then this could give rise to long term requirements. Australian courts may be more likely to enforce these restrictions (if they arise in a context other than employment arrangements) but could take account of matters such as the extent of your continuing involvement in the business and any payments that you receive on the sale of your interests.
- This article was originally published in www.smartcompany.com.au