Trading name vs Company name…Don’t get caught out when buying a business

A young couple signed an Agreement for Sale and Purchase to buy an IT business.  The business traded as “On Call IT” and was owned by a company, “On Call IT Specialists Limited”. 

The couple agreed to buy the trading name as part of the purchase and included a basic clause to that effect in the Agreement for Sale and Purchase.  They decided to set up a new company to own the business, which related to their family name (“Jones IT Limited”).  They continued to trade as “On Call IT”.

Two years later, they heard through their networks that the original seller (usually called a Vendor) had set up a new company through the Companies Office called “Your On Call IT Specialists Limited” and was providing IT services in a similar sector of the market, trading as “Your On Call IT Specialists”.

The clause in the Agreement regarding the trading name was very narrow and did not cover any future use of the company name or the use of any names similar to the trading name.  The couple had included a restraint of trade provision in their Agreement for Sale and Purchase preventing the Vendor from competing with their business, but that had expired. 

Customers were starting to get confused as to which business was which and whether the businesses were connected.  The couple asked their lawyer for advice and discovered that due to the way they had drafted their Agreement for Sale and Purchase, there was very little they could do.

Is a company name different from a trading name?

Yes it is.  It is very important to recognise the difference when buying a business.

A company is a legal entity, which is often used to own a business.  Because they are legal entities, companies can do things like enter into contracts and borrow money.

A trading name is the name used for the business in trade and is the name by which customers know the business.  It can be a completely different name from the company that owns the business.  The trading name is not a legal entity on its own.

When you buy a business, generally you will want to buy the trading name because of the goodwill and customer recognition associated with that name.  Trading names are generally sold with a business as part of the “intangible assets” along with things like customer databases.

Avoiding a situation where someone else uses your company name or trading name…

There are ways to help to prevent the situation above, including:

1. Taking over the Vendor’s company name or setting up a very similarly named company name when you buy a business (as the Companies Office will not register a company where there is another company with the same or a very similar name);

2. If you are not taking over the Vendor’s company name, adding a clause to your Agreement for Sale and Purchase of a Business whereby:

• The Vendor agrees to change the name of the existing company; and/or
• The Vendor agrees to grant all ownership and rights to use all names and brand names associated with the business (such as “On Call IT” or similar) to the Purchaser.

3. Protect your trading name and/or company name by applying for a trademark for those names.  It is important to be aware that registering a company does not automatically give you a trademark over that name, and vice versa – they are completely separate processes.

In the situation of the young couple above, option 3 was unfortunately the only option available to them, given settlement of the transaction had already occurred.  However, it was not guaranteed that they would be successful in obtaining the trademark.

There are many different aspects to a business purchase, and the trading name and purchasing entity are both vitally important.  It is essential that you take professional advice before you sign an Agreement for Sale and Purchase of a Business, and throughout the process, to make sure you are protected and fully understand your rights and obligations.