Restraint Clauses In Sale Of Business Agreements

Priya buys a suburban hair salon in Melbourne. The price includes the name, client list, fitout, staff, social media accounts and the goodwill being sold that has taken the seller 10 years to build.

Two months after settlement, the seller opens a new salon around the corner and starts messaging old clients. Priya feels like she's paid for a business, but not really received what she paid for.

That's exactly the kind of problem a restraint clause in a sale of business agreement is designed to deal with. The tricky part is getting the period, area and activities right, so the clause actually protects the buyer without going further than the law is likely to allow.

What Is A Restraint Clause In A Sale Of Business Agreement?

A restraint clause is a promise by the seller not to do certain things after the business is sold, usually for a set time and within a set area.

In a business sale, the buyer is often paying for goodwill. That goodwill might include:

• customer relationships
• supplier relationships
• brand reputation
• confidential business information
• staff knowledge and continuity
• the benefit of the seller stepping away from the market for a while

A restraint clause helps make sure the seller doesn't immediately undermine that goodwill after settlement.

For example, a business sale agreement restraint might say the seller must not, for 2 years after completion and within 5 kilometres of the premises:

• own or operate a competing business
• work for a direct competitor
• solicit customers of the sold business
• poach employees or contractors
• use the business' confidential information

The wording matters. A clause that simply says the seller can't be involved in any business anywhere in Australia for 10 years is very different from a carefully drafted clause that targets the actual goodwill being sold.

Are Restraint Clauses Enforceable In Australian Business Sales?

Yes, restraint clauses can be enforceable in Australian business sales, but only if they're reasonably necessary to protect a legitimate business interest.

Australian courts start from the position that a restraint of trade is against public policy unless it can be justified. In plain English, the law doesn't usually like stopping someone from earning a living. But business sale restraints are treated differently from ordinary employment restraints.

That's because, in a sale of business, the buyer has usually paid real money for the goodwill of the business. The seller has also chosen to sell that goodwill, often with legal and accounting advice on both sides. That makes courts more willing to uphold a restraint than they might be in an employer and employee situation.

A court will usually look at whether the restraint protects something genuine, such as:

• the customer connections the buyer has paid for
• confidential information transferred with the business
• the value of the trading name, brand and reputation
• the stability of staff and supplier relationships

It won't be enough for the buyer to say, I'd prefer the seller to disappear from the market completely. The restraint needs to be tied to the business that was sold.

In New South Wales, the Restraints of Trade Act 1976 (NSW) gives courts more flexibility to read down a restraint so it operates to a reasonable extent. In other states and territories, the common law approach is more central, so drafting becomes even more important. Well-drafted cascading restraints are often used to give a court workable options if part of the clause goes too far.

How Long Can A Vendor Restraint Clause Last?

It depends, but the restraint period should be no longer than reasonably needed to protect the goodwill being transferred.

There isn't a single fixed period that works for every sale. A reasonable restraint period for a local cafe might be different from a specialist professional services firm with long client relationships.

Common periods in small business sales often range from 6 months to 3 years, depending on the business and the deal. Longer periods can be possible, but they need stronger justification.

What A Court May Consider

When looking at time, a court may consider things like:

• how long it usually takes customers to form loyalty with the new owner
• whether the seller had a strong personal relationship with customers
• how often customers return or renew contracts
• whether the buyer is paying a significant amount for goodwill
• whether the business depends on referrals or repeat work
• how specialised the market is

Say Mike sells a commercial cleaning business in Brisbane. Most customer contracts renew yearly, and many clients dealt with Mike personally for years. A 2 year non-compete may be easier to justify than a 5 year restraint, because the buyer likely needs time to transition relationships but not to control the market indefinitely.

On the other hand, if you're buying a takeaway shop with mostly walk-in customers and limited personal connection to the seller, a much shorter restraint may be enough.

Why Cascading Periods Are Common

Many sale agreements use cascading periods. For example, the clause might list:

• 3 years
• 2 years
• 1 year
• 6 months

The idea is that if the longest period goes too far, a shorter period may still survive. This only works if the clause is drafted carefully. A messy cascade can create confusion instead of protection.

How Wide Can The Restraint Area Be?

The restraint area should match the real geographic reach of the business and its goodwill.

If the business is a neighbourhood cafe, the relevant area may be a few kilometres around the premises. If it's an online business selling across Australia, the area may need to be broader, but the activities being restrained may need to be narrower.

Courts generally ask whether the area is reasonably connected to the goodwill the buyer purchased. A buyer can't usually stop a seller from competing in places where the sold business had no customers, no reputation and no real market presence.

Examples Of Restraint Areas

Depending on the business, a restraint area might be framed by:

• a radius from the business premises, such as 5 kilometres or 10 kilometres
• a suburb, local government area or region
• a state or territory, where the business genuinely operates at that level
• Australia-wide, for national online businesses or businesses with national clients
• specific customer accounts, rather than geography

For example, if you buy a physiotherapy clinic in Adelaide that mainly serves clients within nearby suburbs, an Australia-wide restraint is likely to raise questions. But if you buy a SaaS business with paying customers across Australia and no physical territory, a customer-based or Australia-wide restraint may make more sense.

Using Cascading Areas

Like restraint periods, areas are often drafted as a cascade. For example:

• within 20 kilometres of the premises
• within 10 kilometres of the premises
• within 5 kilometres of the premises
• within the suburb of the premises

This gives the clause a better chance of being partly upheld if a wider area is unreasonable. Still, you shouldn't treat cascading wording as permission to ask for everything. The starting point should still be a sensible assessment of the business.

What Activities Can A Seller Be Stopped From Doing?

A seller can be stopped from activities that would damage the goodwill sold to the buyer, but the clause shouldn't restrain more than necessary.

Most sale of business non-compete clauses in Australia cover several different types of conduct. Each one does a slightly different job.

Competing With The Business

A non-compete clause may stop the seller from owning, operating, advising, funding or working in a competing business during the restraint period and within the restraint area.

This is usually the broadest part of the restraint, so it needs the most care. If the seller is a qualified chef, hairdresser, accountant, mechanic or consultant, a clause that prevents them from working in their industry entirely may be harder to justify unless it's tightly tied to the business sold.

Soliciting Customers

A non-solicitation clause stops the seller from actively approaching customers of the sold business.

This is often easier to justify than a broad non-compete, especially where the seller had direct customer relationships. It can cover calls, emails, direct messages, social media outreach and other attempts to move customers away from the buyer.

Accepting Work From Customers

Some clauses go further and stop the seller from accepting work from former customers, even if the customer approaches them first.

This can be useful, but it may need careful limits. For example, it might apply only to customers who dealt with the business in the 12 months before completion, not every person who ever made an enquiry.

Poaching Staff Or Contractors

A restraint can stop the seller from encouraging employees, contractors or key consultants to leave the business.

This helps protect the continuity the buyer expected to receive. It's especially relevant if staff relationships are a key part of the sale, such as in hospitality, childcare, health, trades or professional services businesses.

Using Confidential Information

The seller should also be restricted from using or disclosing confidential information, including pricing, customer lists, supplier terms, recipes, processes, marketing plans and financial information.

Confidentiality obligations often sit alongside the restraint clause and may last longer. Some confidential information needs ongoing protection, not just protection for the restraint period.

What Is Reasonable For A Buyer And Seller To Agree?

A reasonable restraint is one that protects the buyer's bargain without unfairly stopping the seller from making a living.

If you're the buyer, you want enough protection to make sure the seller doesn't take back the goodwill you paid for. If you're the seller, you want clarity about what you can and can't do after settlement.

A practical way to approach the clause is to work through these questions before signing:

• What goodwill is actually being sold? Is it local foot traffic, repeat customers, online brand recognition, supplier relationships or personal trust in the seller?
• How connected is the seller to customers? The stronger the seller's personal pull, the stronger the buyer's case for a restraint.
• Where does the business really trade? Look at customer location, service area, marketing reach and revenue sources.
• How long will the buyer need to transition relationships? Think about contract cycles, repeat purchase patterns and handover support.
• What activities would genuinely cause harm? Direct customer solicitation may be a bigger issue than the seller taking an unrelated role in the same broad industry.
• What has been paid for goodwill? If the purchase price clearly includes goodwill, that supports the need for protection.

The sale agreement should also work neatly with the rest of the deal documents. For example, if the seller is staying on under a transition services agreement, consultancy period or employment period, the restraint should line up with those arrangements.

Templates often miss these practical links. A restraint that looks fine in isolation can create problems if it doesn't match the business sale agreement, employee transfer arrangements, intellectual property transfer, lease assignment or supplier handover.

What Happens If The Seller Breaches The Restraint?

If the seller breaches the restraint, the buyer may have contractual rights, but the practical outcome depends on the wording and the facts.

Common issues include the seller opening a competing business, contacting customers, taking staff, using the old customer database or trading under a confusingly similar name.

The buyer may be able to seek remedies such as:

• requiring the seller to stop the conduct
• claiming compensation for losses caused by the breach
• relying on any indemnity or breach provisions in the sale agreement
• using confidentiality, intellectual property or Australian Consumer Law arguments where relevant

The Australian Consumer Law, which sits in Schedule 2 of the Competition and Consumer Act 2010 (Cth), may also be relevant if the seller's conduct involves misleading or deceptive conduct. For example, if the seller suggests they're still connected with the sold business when they're not, that can create a separate legal issue.

If you're the seller, a vague restraint can leave you uncertain about your next move. You may think you're starting something unrelated, while the buyer sees it as a breach. Clear drafting reduces the chance of a dispute later.

If you're the buyer, don't wait until settlement to think about enforcement. The sale agreement should make the restraint easy to understand and practical to monitor. For example, customer lists, social media accounts, domain names, phone numbers and email addresses should be covered in a completion checklist and clearly handed over, so there's less room for confusion.

How Should You Draft A Restraint Clause In A Business Sale Agreement?

You should draft the restraint around the actual business being sold, not around a generic idea of stopping competition.

A strong clause is usually specific, layered and commercially sensible.

Start With The Protected Interest

Be clear about what the restraint is protecting. In a sale of business, this is often the goodwill, customer connections, staff stability, confidential information and value of the business name.

If you can't explain what the restraint protects, the clause may be harder to defend.

Define The Restricted Business Carefully

The clause should describe the competing business clearly. Avoid wording so broad that it captures unrelated work.

For example, if you're buying a dog grooming salon, the seller probably doesn't need to be restrained from every type of pet industry work across Australia. The real concern may be operating or promoting another dog grooming business within the local service area.

Use Sensible Cascades

Cascading clauses can cover alternative periods, areas and activities. They can be helpful, especially outside NSW where courts may have less flexibility to rewrite an unreasonable restraint.

But the cascade still needs to be readable. If the clause creates dozens of combinations that no one can understand, it may do more harm than good.

Separate Different Restrictions

It's often better to separate:

• non-compete obligations
• non-solicitation of customers
• non-dealing with customers
• non-poaching of staff
• confidentiality obligations
• intellectual property carve out and brand use restrictions

This helps each part stand on its own. If one restriction is too broad, another narrower one may still be useful.

Check The Seller's Future Plans

If the seller plans to keep working in the industry, don't leave that conversation until after signing. Spell out what is allowed and what isn't.

For example, the seller may be allowed to work as an employee for a non-competing business outside the area, but not open a competing shop nearby or contact former customers. That kind of clarity can make the deal easier for both sides.

Key Takeaways

• A restraint clause in a sale of business agreement can be enforceable in Australia if it's reasonable and protects genuine goodwill.
• Business sale restraints are often treated more favourably than employment restraints because the buyer has paid for the business' goodwill.
• The restraint period, area and restricted activities should match the actual business being sold.
• Customer non-solicitation, staff non-poaching and confidentiality clauses can be just as important as a non-compete.
• Cascading clauses can help, but they still need careful drafting and shouldn't be used to overreach.
• Both buyer and seller should get the restraint clear before signing, so there are fewer surprises after settlement.

If you'd like help with your business sale agreement, vendor restraint clauses, confidentiality obligations or handover terms, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.