Though more often discussed in the context of employment contracts, restrictive covenants are also extremely important in contracts for the sale of a business. A restrictive covenant provides an important protection to the purchaser by ensuring that he receives the full benefit of the goodwill of the business. In essence, it protects the business purchaser’s expectations. A carefully tailored restrictive covenant will protect the purchaser from unwanted competition for years after the business sale takes place.
Generally, a restrictive covenant must serve a legitimate protectable interest and be reasonable in scope and duration, but must not impose an undue hardship on the restricted party or be injurious to the public. Notwithstanding greater deference accorded covenants in connection with the sale of a business, New Jersey subscribes to the “blue pencil” doctrine; covenants that are too overreaching are subject to being reformed on equitable grounds or held unenforceable. As such, it is important to know the factors used by New Jersey’s courts to test restrictive covenants for validity.
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