When you sell your business in Australia, the buyer will include a restraint of trade clause in the sale agreement. This clause prevents you from competing with the business you’ve sold — for a defined period, in a defined geographic area, and across a defined list of activities. In Australian business sales, restraint periods of two to five years are standard and courts regularly enforce them. Unlike employment contracts, where courts approach restraints with scepticism, courts treat business sale restraints as agreements between commercial equals — and that distinction matters considerably when you’re the one being asked to sign.
What Is a Restraint of Trade Clause in a Business Sale?
A restraint of trade clause is a contractual term that limits what you can do after the sale completes. In a business sale context, it typically prevents you from:
- starting or working in a competing business for a defined period
- poaching clients or customers from the business you’ve sold
- soliciting key staff to leave and join you elsewhere
- using confidential information — client lists, pricing data, supplier relationships — for your own benefit
The clause exists because goodwill is, in large part, what you’re selling. When a buyer pays $3 million for your business, a substantial portion of that price is the customer relationships, the brand reputation, the recurring revenue. The restraint stops you from walking out of settlement and immediately setting up a competitor — which, from the buyer’s perspective, is just buying their own clients back at full price.
Rule of thumb: the higher the proportion of purchase price attributed to goodwill, the broader and longer the restraint the buyer will seek.
Why Business Sales Are Treated Differently From Employment Contracts
Australian courts draw a sharp line between restraint clauses in employment contracts and those in business sale agreements. In employment, courts are sceptical — there’s often a significant power imbalance, and the law doesn’t want to leave people unable to earn a living in the only field they know.
Business sale restraints work on different principles entirely. You negotiated the sale as a commercial equal. You received substantial payment — in many cases millions of dollars — specifically for the goodwill the restraint is designed to protect. The foundational principle comes from Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] AC 535, still applied in Australian courts: a restraint in a business sale will be upheld if it’s reasonable in the interests of both parties and not contrary to the public interest.
In practice, buyers have considerably more latitude to impose and enforce broad restraints in business sales than employers do in employment contracts. A restraint that would be struck out in an employment agreement might be perfectly enforceable in a sale agreement. Many sellers don’t realise this until they’ve already signed.
What Makes a Restraint Clause “Reasonable”?
Courts assess four dimensions: duration, geographic scope, activities restricted, and whether there’s a legitimate interest worth protecting. Each one is a negotiation point — not a fixed position.
Duration: How Long Is Too Long?
Two to five years is the standard range in Australian business sales, and courts regularly uphold periods within it. For businesses where client relationships are long-cycle — accounting practices, healthcare, financial planning — courts have enforced restraints of up to ten years where the purchase price reflected those long-standing relationships.
Duration should be proportionate to the actual transfer period for goodwill. If your accounting practice has clients who have been with you for fifteen years, a two-year restraint may be inadequate from the buyer’s perspective. If you’re selling a high-volume food retail business where customer loyalty is location-driven and transactional, a two-year restraint is already generous.
Geographic Scope: How Wide Is Too Wide?
The restraint should match where the business actually operated — not where the buyer wants to expand. A pest control business servicing metropolitan Perth cannot reasonably be restrained from operating anywhere in Western Australia. A structural steel fabricator supplying mine sites across the Pilbara warrants a broader geographic restriction than one doing domestic subdivision work in Adelaide’s northern suburbs.
Define the area specifically: by suburb, postcode radius, local government area, or state. Anything broader than the business’s actual trading footprint is worth challenging during negotiation.
Restricted Activities: What Exactly Can They Stop You Doing?
The clause should restrict activities that directly compete with the business sold — not everything you’ve ever done professionally. If you’re selling a commercial cleaning company, a restraint on commercial cleaning is reasonable. A restraint on “any building services or facilities management of any kind” that also captures your unrelated strata property consulting work is not.
Push for a precise list of restricted activities. The more specifically they’re defined, the more room you retain to operate in adjacent areas.
Cascade Clauses: The Fine Print Worth Reading Carefully
Many business sale agreements use cascade clauses — sometimes called waterfall clauses — in the restraint section. Rather than a single duration and geographic area, cascade clauses set out a descending hierarchy:
- five years across Australia
- failing that, three years across the relevant state
- failing that, two years within 100km of the principal place of business
- failing that, one year within 50km
The mechanism exists because in most Australian states, courts can only sever an unenforceable restraint — not rewrite it to a narrower scope. If the broadest option is void, the court steps to the next. The buyer effectively gets multiple attempts at enforcement.
New South Wales operates differently. Under the Restraint of Trade Act 1976 (NSW), courts can read down an unreasonable restraint to a reasonable scope rather than simply voiding it. Cascade drafting is less critical in NSW transactions as a result — but for sellers in Victoria, Queensland, Western Australia, and South Australia, the bottom step of the cascade is the minimum the buyer is contractually asking for.
Read every step. The bottom rung is where you actually land if the top ones fail.
How to Negotiate the Restraint as a Seller
The restraint clause typically gets three minutes of attention in a deal where price negotiations run for three months. This is a structural mistake — the restraint can bind you for five years, which is a longer commitment than many people’s mortgages.
A broker told me about a deal in Queensland where the seller had built a plumbing business to around $3.5 million in revenue — solid EBITDA, long commercial service contracts. He signed the sale agreement without closely reading the restraint, which prohibited him from working in “any business providing services to the residential and commercial construction sector” for four years across the state. Eighteen months later, he’d started a bathroom renovation fitting business — different work, different clients. The buyer’s lawyers disagreed. (He won at mediation eventually, but not without nine months of uncertainty and a legal bill that gave him pause.)
Here’s where to focus your attention as a seller:
Duration. Propose the shortest period that protects the buyer’s legitimate interest. If an earn-out period runs for two years, a restraint of two and a half years is defensible. Anything beyond that is the buyer asking for more than the goodwill transfer requires — and you don’t have to give it.
Geographic scope. Name specific boundaries. If your business operated in South East Queensland, write that down in the clause. Refuse national restraints for businesses that never traded nationally.
Activities. Request a precise list with explicit carve-outs for any work you do that doesn’t compete with what was sold. The broader the business description in the sale agreement, the more carefully you need to read this section.
Structure. Whether you’re selling shares in a company or selling the business assets changes who the restraint formally binds. In an asset sale, the vendor company is typically restrained — which can be less meaningful if you can operate through a new entity after settlement. Buyers who understand this often insist on personal restraints on key individuals in asset sale structures. For a fuller treatment of how the choice of structure affects your position, see our guide on asset sale vs share sale in Australia.
Compensation for the restraint. In larger or PE-backed transactions, buyers sometimes offer a separate payment specifically for accepting a long or geographically broad restraint. If you’re agreeing to five years that meaningfully limits your future career options, it’s a legitimate point to raise — particularly if the earn-out component of your deal is modest. For how earn-out arrangements interact with restraint periods, see our piece on earn-out agreements when selling a business.
Get a solicitor who does commercial M&A to review the restraint — not just your accountant, and not you alone at 11pm before settlement. A good M&A lawyer will have seen cascade clause structures before, understand how courts in your state approach enforceability, and identify language that’s been drafted broad by design rather than by accident.
For where the restraint clause sits within the full architecture of a business sale, our overview of the M&A process explained covers each stage from preparation through to settlement.
What Happens If You Breach a Restraint?
The buyer’s primary remedy is an injunction — a court order requiring you to stop the competing activity immediately. Courts can issue interlocutory injunctions within days of an application, and they don’t require proof of financial loss first. The breach is the trigger.
Once an injunction is in place, the buyer can pursue a damages claim for what was lost: customers diverted, contracts taken, referral relationships captured. If the breach was deliberate and you demonstrably profited from it, courts have awarded additional damages to reflect that.
Business sale restraint breaches are treated more seriously by Australian courts than employment restraint breaches. The reasoning is direct: you received payment specifically for the goodwill you’re now competing with. The equities don’t favour the seller in that scenario.
If you’re approaching the end of your restraint period and starting to plan your next venture, get specific advice on when the clock started (it’s usually the settlement date, but check the agreement), what the geographic boundary actually covers in practice, and which activities are genuinely restricted. Assumptions in this area tend to be expensive.
FAQ
How long does a restraint of trade clause last in a business sale?
In Australian business sales, restraint periods of two to five years are commonly enforced. For businesses with strong goodwill or long client relationships, courts have upheld restraints of up to ten years. Duration should match how long goodwill actually takes to transfer to the buyer.
Can you negotiate a restraint of trade clause when selling your business?
Yes — everything in a sale agreement is negotiable. As a seller, you can push back on duration, geographic scope, and the list of restricted activities. A shorter period, a tighter geographic boundary, or carve-outs for unrelated industries are all reasonable positions to take.
What happens if you breach a restraint of trade clause after selling your business?
The buyer can seek an injunction to stop you competing immediately and claim damages for business lost. Courts take business sale restraint breaches seriously — more so than employment restraints — because you received payment for the goodwill you’re now competing with.
Is a restraint of trade clause enforceable in Australia?
Yes, if it’s reasonable. Courts assess duration, geographic scope, and the activities restricted. Business sale restraints face a higher standard of enforceability than employment restraints because both parties were commercial equals when the contract was signed.
Does a restraint of trade clause apply to directors and key employees of the business?
A well-drafted sale agreement will include separate restraints on the vendor, key directors, and sometimes key employees. If senior staff could take clients with them on departure, the buyer will want restraints on those individuals as well as you.
If you’re working through the sale of your business and want guidance on what you’re agreeing to in the documents — not just the headline price — get in touch with Miro Capital. We work with Australian business owners on transactions in the $1 million to $20 million range. If you’re still working out what your business is worth before the negotiation starts, our valuation calculator is a useful first step.