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Protecting the goodwill of a business

Protecting the goodwill of a business

Expert view

When buying a business, one of the most important assets which you acquire is the goodwill (the established reputation) of the business. This is, in effect, the ‘life blood’ of the business. As lawyers who protect our business clients’ interests, we cannot stress enough the importance of putting measures in place to protect these interests.

The standard method of protecting the goodwill of a business is by ensuring that your solicitor drafts a strong restrictive covenant clause into the sale and purchase agreement.

A standard covenant will generally prohibit the seller from directly/indirectly competing with the business, poaching staff and or customers, or interfering in the supply chain for an agreed time period.

There are two main problems with this sort of restriction:

  1. they are not enforceable unless they are no more restrictive than is reasonably necessary; and
  2. it can be difficult and expensive to prove the loss suffered by the business as a result of a breach, as loss of sales/profits could be caused by other factors.

The first problem can be addressed by careful drafting tailored to the specific nature of the business in question.  In cases where the business has a very wide catchment area or relies heavily on internet sales and marketing, the courts have been prepared to enforce restrictions which apply nationally and even globally.

One of the ways of solving the second is to agree to part of the payment being deferred and for this to be forfeited if the restriction is breached. The Supreme Court decided recently that such an agreement would be enforced where it amounts to a price adjustment mechanism as opposed to an unreasonable penalty to discourage the breach.  The distinction can be subtle and calls for careful drafting depending on the particular circumstances of the business.

At Meade King we assist and advise many clients in the sale and purchase of businesses of all sizes and we understand that every business is different. We work hard to understand our clients and their business needs, so that their interests are protected. If you’re thinking of buying a business, we would strongly urge you to seek legal advice early on, so that you can ensure you get the best deal possible.

If you would like to speak to one of our Company and Commercial lawyers, please call 0117 926 4121 or make a Free Enquiry Online.