Short answer: Under the draft Banning Unfair Non-Competes Bill, non-competes would stop working for most employees once the law starts, expected in 2027. Existing contracts keep them until they are changed. If you are selling in the next year or two, getting your team contracts right before the start date may give a buyer stronger protection, depending on how the sale is structured.
If you are planning to sell your business in the next year or two, the contracts your team has signed are part of what a buyer is paying for. And the rules for those contracts are about to change.
Treasury released the exposure draft of the Banning Unfair Non-Competes Bill on 7 September. As it stands, a non-compete for any employee earning under the high income threshold ($190,100 for the year to 30 June 2027) would stop working, as would every non-compete for a casual and every clause that stops a departing employee recruiting their co-workers. Agreements between businesses not to poach each other’s staff would become cartel conduct. It is still a draft and the detail may change, but the Government has said the changes are expected to start in 2027. For anyone taking a business to market in that window, sellers and the brokers advising them, this is worth getting across now.
What a buyer is really paying for
A buyer is rarely just buying assets and a profit figure. They are paying for customers who keep coming back, and for the team that keeps them coming back. That is why one of the first things a buyer’s lawyer looks at in due diligence (the buyer’s investigation of the business before they commit) is the employment contracts. We review them for every buyer client we act for. The question is always the same: if a key person leaves after the sale, what stops them taking clients, suppliers or other staff with them?
Up to now, for a lot of businesses the answer has been the non-compete. Under the draft, for most of the team, that clause would stop working for any new contract signed after the law starts.
Why now is the window
Existing contracts are grandfathered. The non-competes already in your team’s contracts keep working after the law starts, until a contract is changed. And a change may include something as routine as a pay rise.
Which means the contracts your team signs before the start date may be the strongest you will ever be able to put in place for those roles. If your contracts are out of date, a few years old, or were never written with a sale in mind, the months before the law starts are your chance to get them right.
Depending on how the business is sold, that work may also be something a buyer can take advantage of. In some sale structures your existing contracts carry across to the buyer as they are. In others your team signs new contracts with the buyer, under whatever rules apply at the time. How your sale is structured changes what your contracts are worth to a buyer, and it’s much easier to plan for that now than in the middle of a deal.
The changes could also affect the restraints you give as the seller in the sale agreement. There is more detail to work through on that, and we are taking our clients through what it means for their own sale.
A deal that nearly fell over the day before exchange
A great example of why the team contracts matter so much on a sale is a story from my book, Buy, Grow, Exit. Rod and Jane had done everything right. Years before they sold, they put in a general manager and stepped back, so a buyer could take over a business that ran without them. It worked. They had several strong offers and a great price.
Then, the day before exchange, the general manager told them he would walk out and leave the deal in pieces unless they gave him a share of the sale price. Rod and Jane refused to be held to ransom, and that night he left. They were distraught. They had been out of the business for a year and working on the sale for just as long. The buyers were rattled and wanted to pull out.
The deal was saved, but on different terms: an earnout for the buyer (part of the price paid later, depending on how the business performed), and Rod and Jane back in the business for another year to help with the handover. Far better than a lost deal, but a long way from the exit they had planned.
We didn’t act for Rod and Jane until the sale itself, so we never had the chance to help them lay the right foundations in the years before. If we had, the general manager’s contract, and the rest of the team’s, would have been one of the first things we looked at.
The lesson for you, if a sale is on the horizon, is to get your team’s employment contracts as tight as they can be well before you go to market. And under the draft, the window to do that for most of your team may close when the law starts.
What to look at before you go to market
- Who holds the client relationships and the know-how, and what their contracts say about leaving.
- Which of those people sit under the threshold or are casual, so you know whose non-compete is affected.
- Whether the client, confidentiality and IP clauses would protect the business on their own, because for most of the team they are what will be left.
- Whether any changes are coming up (pay reviews, promotions, new roles) that should be timed around the start date.
- How the sale is likely to be structured, because that affects what carries across to a buyer.
The right answer depends on the business, the people in it and how it is likely to be sold. Doing this properly is not a copy-paste job, but it is far cheaper a year out than in the middle of due diligence.
Common questions
Does the non-compete ban affect selling a business?
It can. A buyer pays for the team and the clients they look after, and the draft law changes which employee restraints will work. It could also affect the restraints a seller gives in the sale agreement. How it plays out depends on the business and how the sale is structured, so it’s worth working through before going to market.
What do buyers look for in employment contracts?
In due diligence a buyer’s lawyer checks what stops key people leaving and taking clients, suppliers or other staff. That means the restraints, the confidentiality and IP clauses, and how each person is engaged. Out-of-date contracts rarely kill a deal, but they can change the terms a buyer asks for.
Should I update my team’s contracts before I sell?
If a sale is a year or two away, the months before the law starts may be the best time. Contracts signed before the start date keep their non-competes until changed, so they may be the strongest you can put in place. What to change depends on the roles and how the sale is likely to be structured.
Will my existing non-compete clauses carry across to a buyer?
It depends on how the business is sold. In some structures the existing contracts carry across to the buyer as they are. In others the team signs new contracts with the buyer, under the rules that apply at the time. It’s worth planning for this well before a buyer is at the table.
Is a seller’s restraint in a sale agreement banned?
The employee non-compete ban applies to terms of employment, so a seller’s own restraint in the sale agreement sits outside it. But other parts of the draft could affect the restraints a seller gives, and the detail is still being worked through. Get advice on your own sale before relying on a standard clause.
What to do about it
If a sale is on the horizon, the cheapest time to act is before the law starts and before you go to market.
- If you are selling, or thinking about it: Book a Ready to Exit Consultation and we will talk through where your contracts stand and what a buyer would see in them today.
- If you are a broker with a seller heading to market: This is a conversation worth having with every seller before listing. Refer them to us for a pre-sale contract review and we will work alongside you to get them ready.
This is draft legislation and may still change. We will keep you updated as it moves.
