Non-Compete and Non-Solicit Clauses When Selling a Small Business

Most buyers of a small business will ask the seller to agree not to compete for a while after the sale. It's a normal request. The details are what matter, so it helps to understand the clause before it shows up in the purchase agreement.

Why buyers ask for one

Much of what a buyer pays for is goodwill: your customers, your name in the community and what you know about running the business. If you opened a similar business down the street the month after closing, much of that value could walk out the door with you. A non-compete clause protects the buyer from that, and it often makes lenders more comfortable with the deal too.

Because it protects the price, a buyer may treat a fair non-compete as part of what they're paying for. Refusing one outright can lower offers or end talks.

What a reasonable clause covers

• Time. How long you agree not to compete after closing. Longer isn't always safer for the buyer, since an unreasonable term may not hold up.
• Area. Where the restriction applies, ideally tied to where the business actually serves customers.
• Activities. Exactly what you can't do, described in terms that match the business you sold, not every line of work you've ever done.
• Who it binds. Usually you as the seller, and sometimes your company or family members who were involved in the business.

Clear, specific wording protects both sides. Vague clauses lead to arguments later about what was agreed.

Non-solicit and confidentiality clauses

A non-solicit clause stops you from approaching the business's customers or employees for a period after the sale. It's narrower than a non-compete and is common alongside one. A confidentiality clause covers the business information you know, such as pricing, suppliers and customer lists. You may already have signed a confidentiality agreement early in the process; our guide to NDAs when selling a business explains how that works.

What to check before you sign

1. Read the clause on its own and ask: what exactly could I not do, where, and for how long?
2. Think about your own plans after the sale, such as consulting, part-time work or a different business, and make sure they're clearly allowed.
3. Check how it fits with any job or consulting role you're taking with the buyer during the handover period.
4. Ask your accountant how the clause affects the price allocation and your tax.
5. Have your lawyer review the final wording before you sign the purchase agreement.

Provincial rules differ

Courts across Canada generally treat a non-compete given by a seller as part of a business sale differently from one in an ordinary employment contract, but the terms still need to be reasonable. Some provinces also have their own rules. Ontario, for example, bans most non-compete agreements in employment, with an exception for certain sales of a business where the seller becomes the buyer's employee. If you live in BC, Alberta or elsewhere, a local lawyer can tell you what applies.

A note on advice

This guide is general information, not legal or tax advice. Non-compete terms can limit what you do for years after a sale, so please have your own lawyer and accountant review them before you agree.