Restraint of Trade Clauses When Buying a Business in Australia: What Buyers Need to Know
A restraint of trade clause is the part of your sale and purchase agreement that stops the seller from walking out the door on settlement day and immediately starting the same business across the road. It's also, in my experience, one of the most negotiated and least understood clauses in any Australian business sale.
Most first-time buyers either accept whatever the seller's lawyer drafts — which tends to be as narrow as possible — or they go the other way and demand sweeping restrictions that courts won't enforce anyway. Neither approach is particularly useful.
Here's what the clause actually does, what makes it stick in Australia, and how to negotiate it so it protects what you're paying for.
What Is a Restraint of Trade Clause?
A restraint of trade clause in a business sale agreement is a contractual restriction that prevents the seller (and sometimes related parties like key staff) from competing against the business they've just sold, for a defined period of time and within a defined geographic area.
In an Australian small business context, a typical clause might read: the seller agrees not to operate, own, or be employed by a competing business within 50 kilometres of [location] for a period of two years from the settlement date.
The restraint can also cover solicitation — meaning the seller can't approach the business's existing customers or staff, even if they're not technically competing. This matters a lot in trades businesses where the seller has personal relationships with every major account.
The clause exists because you're not just buying equipment and systems. You're paying for goodwill — the customer relationships, the reputation, the pipeline — and goodwill is worthless if the person who built it immediately starts rebuilding the same thing next door.
Are Restraint of Trade Clauses Enforceable in Australia?
Yes, restraint of trade clauses are enforceable in Australia in the context of a business sale, provided they are reasonable in scope. This is different from employment contracts, where courts apply much stricter scrutiny.
Under Australian common law, a restraint of trade clause is enforceable if it:
- Protects a legitimate business interest (the goodwill being transferred)
- Is reasonable as between the parties (proportionate to what was paid)
- Is not contrary to the public interest
The key word is reasonable. A two-year restraint covering the greater metropolitan area of the city where the business operates is generally considered reasonable for a trade services business. A ten-year restraint covering all of Australia is not — and a court will either strike it out entirely or read it down to whatever scope it considers reasonable (which might be less than you wanted).
New South Wales has a specific statute — the Restraints of Trade Act 1976 (NSW) — that allows courts to read down unreasonable restraints to a reasonable scope rather than voiding them entirely. Other states rely more heavily on common law. This is worth knowing if your business is outside NSW.
What Makes a Restraint Clause Reasonable?
Reasonableness in a business sale context depends on four things.
Duration. For small trades businesses changing hands at $300K–$1.5M, two to three years is typically defensible. The longer the seller's tenure and the more relationship-dependent the business, the longer the court will accept. Five years is pushing it unless the purchase price is substantial. Anything over five years is very hard to enforce without exceptional circumstances.
Geographic scope. The area covered should reflect where the business actually operates and where goodwill exists. A mobile plumbing business that works across Brisbane and surrounds — a restraint covering all of South-East Queensland makes sense. A solo cleaning business operating in a single suburb of Melbourne — all of Victoria does not.
Activities covered. The clause should define what counts as competing. "Operating a business" is a start, but you also want to cover: being a director, shareholder, employee, or contractor of a competing business; soliciting customers; and soliciting staff. Each of these needs to be listed explicitly, because courts interpret restraints narrowly.
Who it covers. The restraint binds the selling entity and the individual owner personally. If there are multiple owners, each one should sign. If there are key staff members who were named as part of the goodwill — the office manager who runs the scheduling system, the leading hand who manages every major account — consider whether those individuals need their own restraints in their employment agreements.
A broker told me last month about a deal where the buyer skipped a personal restraint on the seller's wife, who had been running the admin side of a pest control business for fifteen years. Within six months she had quietly set up a competing bookings service using the same customer database. The clause was technically clean; the deal was not.
How Long Should a Restraint Period Be?
For most Australian small business acquisitions in the $100K–$2M range, a restraint period of two to three years is the practical target. Here's a rough guide by business type:
Trades businesses (plumbing, electrical, HVAC, pest control): Two to three years, covering the service territory plus a reasonable buffer. The primary risk is the seller calling up their trade account contacts, so the non-solicitation element matters as much as the non-compete.
Service businesses with recurring contracts (commercial cleaning, lawn care, fire protection): Three years minimum. Recurring contracts are what you're paying the premium for, and the risk of the seller signing those clients up with a new entity is highest in year one and two post-settlement.
Retail or hospitality: One to two years typically, unless the business has a strong reputation built around a named individual.
Professional services (accounting, bookkeeping, financial planning): Three to five years is defensible here given the relationship-dependent nature of the client base, and courts in this space have enforced longer restraints when the sale price was substantial.
This is covered in depth in Module 7 of the Playbook alongside the other SPA negotiation terms that buyers tend to gloss over.
Negotiating the Restraint as a Buyer
Most sellers accept a reasonable restraint without much fuss — they've decided to exit and they're not planning to compete anyway. The negotiation usually comes down to scope rather than principle.
Where you'll get pushback:
Geographic scope. Sellers who plan to move interstate or who have a separate business in a related industry will push back on wide geographic restraints. Your leverage here is that goodwill doesn't exist where the business doesn't operate — so if the business only serves suburbs within 30km of its depot, a state-wide restraint is an overreach and the seller can reasonably object.
Duration. Three years will often get a counteroffer of eighteen months. Two years is usually the landing zone for most small business deals.
Activities covered. Watch for sellers who try to carve out "consulting" or "industry advisory work" from the restraint. If they're calling your customers to consult, they're competing. The carve-out should be genuine — allowing them to work in a non-competing industry is reasonable; allowing them to advise competitors is not.
Consideration. In some deals, particularly where the seller is also staying on as an employee during a transition, the restraint is tied to ongoing payments. If the buyer terminates the employment early, the seller may argue the restraint fails for lack of consideration. Get advice on whether your clause needs separate consideration or whether the purchase price covers it.
Free resource: The SPA Key Terms Checklist covers restraint of trade alongside the 14 other clauses every Australian buyer should review before signing.
What Happens if the Seller Breaches the Restraint?
Breach of a restraint of trade clause gives you access to two main remedies: injunctive relief and damages.
An injunction is an order from the court requiring the seller to stop the competing activity. Courts in Australia will grant interlocutory injunctions (interim orders while the matter is being determined) where there's a serious question and the balance of convenience favours the applicant. In a business sale context, where the restraint is in writing and the breach is clearly documented, getting an interlocutory injunction is generally achievable — though it's not cheap.
Damages are the alternative — or in addition to the injunction — and you'll need to prove the financial loss caused by the breach. Proving lost revenue in a small business is messy, so it's worth including a liquidated damages clause in the SPA that sets a pre-agreed amount rather than leaving it to the court to calculate.
The practical issue is that litigation is expensive and slow. Most buyers who face a breach end up negotiating a resolution — the seller agrees to stop, sometimes with a payment to reflect lost customers. Having a strong, clearly drafted clause makes that conversation shorter and cheaper.
During Due Diligence
Review the draft restraint clause during your legal due diligence phase, not at settlement. You want time to negotiate changes, not just sign what's in front of you.
Check:
- Is the clause in the SPA or only referenced in the heads of agreement? Both should be consistent.
- Does it cover the seller personally as well as the selling entity?
- Does it include non-solicitation of customers and staff separately from non-compete?
- What's the definition of "competing business" — is it narrow enough to be meaningful or so broad it might be unenforceable?
- Is there any carve-out and does it make sense?
Your commercial lawyer should review this — specifically one who does business sale work rather than general commercial. The letter of intent is the right stage to flag that you want a reasonable restraint as a condition of the deal, so neither side is surprised when the SPA is drafted.
After settlement is done and money has changed hands is not the moment to discover the clause is unenforceable.
FAQ
Are restraint of trade clauses enforceable in Australia? Yes, in the context of a business sale, restraint of trade clauses are enforceable if they are reasonable in duration, geographic scope, and activities covered, and they protect a legitimate interest (the goodwill being sold).
What is a restraint of trade clause for the sale of a business? It's a clause in the sale and purchase agreement that prevents the seller from competing with the business they've sold, soliciting its customers, or poaching its staff, for a defined period and within a defined area.
How long can a restraint of trade clause last in Australia? For small business sales, two to three years is typical and generally enforceable. Courts will usually not uphold restraints beyond five years unless there are exceptional circumstances, such as a very high purchase price or a highly relationship-dependent business.
What happens if a restraint is unreasonable? In NSW, a court can read the clause down to a reasonable scope rather than voiding it entirely. In other states, an unreasonable restraint may be struck out completely. Either way, you're exposed — which is why getting the drafting right matters.
Does the restraint need to be in the SPA? Yes. A verbal agreement or a note in the heads of agreement is not sufficient. The restraint must be in the signed sale and purchase agreement, with clear definitions of duration, geography, and restricted activities.
The restraint of trade clause is one of those things that most buyers assume is standard and sign without reading. It often is standard — and often is fine. But when it isn't, you find out after settlement when the person who just sold you the business starts calling your best customers. Read it. Get your lawyer to review it. And if the scope isn't right, negotiate it before you sign anything.
For more on the SPA and the negotiation process, start with how to negotiate when buying a business in Australia or download the free SPA Key Terms Checklist.
If you want more content like this — practical stuff on Australian business acquisitions, not theory — subscribe to The Leveraged Worker or work through the Playbook modules from the beginning.