Why the restraint exists.
A buyer paying for goodwill is paying for the business's ability to keep its customers, so the contract restrains the seller from competing after the sale and from soliciting the business's staff and customers, including online. Where the seller is a company, its directors and shareholders are usually asked to sign a deed of covenant on the same terms, because a restraint is only as good as the people it binds, and the standard contract terms reach the directors and shareholders but not other key employees, so a buyer worried about a key person leaving to compete may seek a covenant from them as well.
Reasonable, or unenforceable.
The limit is reasonableness. A restraint that reaches too wide in area, or lasts too long, can be struck down as unreasonable and unenforceable, which would leave the buyer with no protection at all. To manage that, restraints are often drafted in cascading steps, a series of narrowing areas and periods, so that if the widest is found unreasonable a narrower one can still stand. A carefully limited restraint is worth more than an ambitious one that a court will not enforce.
The tax tie-back.
Putting a separate value on the restraint in the contract can cost the seller a concession they would get if that value stayed in goodwill, because a restraint is a separate asset that cannot attract the general discount. So the restraint and the apportionment of the price are considered together. We draft and negotiate these as part of our business sale and purchase service and in standalone restraint and confidentiality agreements.
A restraint drawn too broadly can be worth nothing, because a court may refuse to enforce it, and the standard terms only bind directors and shareholders. If a key employee could walk out and compete, they need to be covered too.
Law referenced: restraint of trade principles; Income Tax Assessment Act 1997 in passing.