How restraint of trade reforms could lower the value of client lists

In the March pre-election budget, Treasurer Jim Chalmers announced the government planned to “abolish non‑compete clauses” for workers earning under $175,000 starting from 2027.

According to the Treasurer in his speech, non-competes are “holding too many Australians back from switching to better, higher‑paying jobs”.

“More than 3 million Australians are captured by these clauses, including childcare workers, construction workers and hairdressers,” Chalmers said.

“People shouldn’t need to hire a lawyer to take the next step in their career. Or permission from their old boss if they want to be their own boss and turn an idea into a small business.”

He also cited Productivity Commission numbers that claimed the reforms “could boost wages by up to 4 per cent”, along with increasing the nation’s gross domestic product by $5 billion annually, lifting productivity and reducing inflation.

Under current legislation, employers are able to include restraint of trade clauses in contracts that can limit a former employee’s ability to provide services to clients of their former employer, carry on a competing business, or entice the clients to leave the former employer.

Labor’s proposal would still undergo consultation should the party win at the polls on Saturday; however, Halsey Legal Services director Fiona Halsey said it is “not clear” exactly how the changes would work in practice.

“It seems likely that it would ban restrictions on working for a competing business or establishing a competing business,” she said.

“It would also ban clauses preventing poaching (these clauses are common, so that an employee cannot leave, take clients and then encourage other employees to join him or her). There does not seem any comment on anti-solicitation clauses in the proposal, but it’s early days.”

Why does it matter for advice practices?

Where the proposed ban on non-competes has the potential to impact financial advice firms, according to Halsey, is all down to the client list.

This, she said, is almost always where the value of an advice business lies, given there are rarely any valuable “hard assets”.

“In an age where it is easy for an employee to download an entire client list onto a USB, and many employees will have client details and contact numbers on their phones, the value of client lists for an employer can easily be destroyed, or at least seriously diminished,” Halsey said.

Beyond just current employees, the move could significantly lower what a firm looking to grow through acquisition is willing to pay for a client book, given the new clients being brought on board will “rarely have a long-standing bond with the employer”.

“The client–adviser bond will develop with whichever adviser is allocated to be the servicing adviser. If that adviser leaves the business, the client often has no rapport with any person still working in the financial planning firm,” Halsey added.

“That means it is virtually impossible to conserve the client if an ex-employee tries to take the client unless there is a well-drafted restraint of trade clause. The damage to the ex-employer can often be in the hundreds of thousands of dollars.”

Generally, purchase agreements for a client book will include restraints from the seller to the buyer, with the client list’s value taking a hit if this can’t be provided – Halsey noted this has been as much as a 20 per cent drop in some cases.

“However, when a business has employed advisers, generally the buyer will require a restraint from each employee, because without that restraint, the buyer does not feel confident that it can keep the clients,” she said.

“It is common to structure a condition precedent that employees must sign a deed of restraint, so the buyer can enforce that restraint in be confident of keeping the clients (or at least the clients will not be subject to attack).

“If buyers cannot be confident that they can protect the client list they are buying, they are logically likely to reduce the purchase price. Given that many purchases occur with staggered payments, another likely outcome would be to reduce the upfront payments, and have a greater proportion paid in later years.”

Similarly, rise and fall clauses based on the recurring revenue following a sale could also be affected by any non-compete ban.

“If an employed adviser leaves and takes clients, this may mean that the recurring revenue drops, and the amount paid by the buyer to the seller also drops,” Halsey added.