Non-Compete Agreement

A non-compete agreement is a contractual restriction that prevents the seller of a business from competing with the buyer in the same industry, geography, or customer segment for a specified period after the sale. Non-competes are a standard element of Canadian business sale transactions, included in the purchase agreement to protect the goodwill the buyer has paid for.

In Canada, non-compete agreements are enforceable only if they are reasonable in scope, duration, and geographic area, and only if the buyer has a legitimate proprietary interest to protect. Courts have generally required that the restriction be limited to the specific activities, territories, and customers that the seller was actively involved with — broadly drafted non-competes are regularly narrowed or struck down by Canadian courts.

A non-compete tied to a business sale is typically treated as a capital receipt by the seller (proceeds for the goodwill being restricted) rather than employment income. Non-solicitation agreements — which restrict the seller from soliciting specific customers or employees rather than prohibiting all competition — are generally more readily enforceable than broad non-competes.

See also: Goodwill, Purchase Agreement, Transition Period.