When buying a business, many purchasers do not understand the importance of considering the assets being transferred, nor ensuring that restraints of trade are in place in respect of the seller.
Intellectual Property assets
When a buyer purchases a business, they often think about assets such as plant and equipment, employees, client details and contracts, licences and permits. However, intellectual property in respect of brand names is commonly neglected in small business sales.
Quite often, the sellers of businesses do not trade mark their business names, and in some cases do not register business names with ASIC. If the brand of a business is important in terms of the sale, it is vital that the business name and trade mark are transferred to the buyer.
If there are no such registrations, the seller should either be required to do what it can to transfer any such intellectual property on completion. Alternatively, the buyer should register the business name (if available) and register the trade mark with consent from the seller.
Where branding is important to the business, it is important to register a trade mark. This will provide the buyer with exclusive rights to use or licence the trade mark. Without a registered trade mark it would be much more difficult to stop a third party, or even the seller, from using the same or a similar name.
Trade mark protection is especially important if a buyer intends to grow a business or sell the business at a later stage, having built a reputation around the brand. A careful buyer would want to know that they can protect and enforce the brand, which could affect the purchase price if they sell the business.
Without a registered trade mark, a potential competitor might register the same or a similar mark threatening the buyer’s brand. They might even demand that the buyer stop using the brand as they would have trade mark protection, whereas the buyer would not.
Restraint of Trade
A restraint of trade is an agreement between a buyer and seller of a business, which provides that the seller cannot compete against the buyer or operate a similar business to the business being sold.
A restraint is generally geographic and time-based, meaning a seller cannot compete in a certain area or for a particular time, e.g. 2 years.
As an example, if you were to buy a retail business selling particular products in the Sydney CBD, you would want to ensure that the seller cannot open near you selling competing products.
Restraint of trade clauses may be difficult to enforce depending on what is reasonable. As a result, most restraint of trade clauses contain cascading clauses to provide a court with alternatives if the geographic area and period of time are too broad. For example, a geographic area may cascade from the geographic area of NSW to the area of Sydney, to the Sydney CBD. If a court were to determine that the area of NSW was too broad, the buyer might still have comfort in limiting the seller from competing in Sydney or the Sydney CBD.
Often in small business sales, buyers are not concerned about competition or assume that the seller will not want to compete. Careful buyers must ensure that reasonable restraints are in place to protect their newly acquired asset.
LegalVision’s lawyers have decades of experience under their belts in advising clients on buying a business and protecting their assets. Please get in touch if you have any questions or would like to chat about your upcoming purchase!