Is a Non-Compete Enforceable When Selling a Business in Alberta?

Buyers pay for more than equipment and inventory. They pay for customers, reputation and goodwill, and they do not want the seller to open next door the following month. A non-compete clause in the sale agreement is meant to prevent that.

Sellers worry about the opposite risk: being shut out of their own industry. This article explains how to think about whether a non-compete in an Alberta business sale is likely to hold up. It does not predict how a court would rule on your clause, since that turns on the facts and the exact wording.

This article covers the law of Alberta.

What a non-compete in a sale is meant to protect

In a business sale, the buyer is purchasing goodwill. If the seller can immediately compete for the same customers, the goodwill may lose much of its value. A non-compete, sometimes paired with a non-solicitation clause, aims to protect what the buyer paid for.

Because the clause limits what a person can do for a living, it is worth taking seriously from both sides of the deal. How a particular clause is treated depends on its exact wording and the facts of the sale, so it is worth having a lawyer review it.

Duration, area and scope

There is no single number of years or kilometres that is safe in every case. A small local shop and a business with customers across Western Canada call for very different answers, and the clause should be drafted around the actual business.

Practical drafting points

• Name the parties correctly, including the selling company and any individual owners who will be bound.
• Describe the restricted business in specific terms rather than with vague words.
• Define the area clearly, for example by named municipalities or a described radius.
• State the start date and end date of the restriction.
• Consider separate clauses for non-competition, non-solicitation of customers and non-solicitation of staff, so each restriction is clear on its own.
• Connect the restriction to the sale, and state that the price reflects the goodwill being protected.

If you are unsure who owns or directs the selling company, a Corporate Registry search through a registry agent can show owners, directors and legal addresses. A registry agent charges a government fee plus a service fee.

Sale of a business compared with employment

A non-compete in a sale agreement and a restriction in an employment relationship arise in different settings, and how each is treated depends on the facts, so it is worth confirming with a lawyer. If you will also work for the business after the sale, make sure the sale agreement and any employment agreement are consistent about what restrictions apply and when they end.

Also consider how the deal is structured. A buyer using certain financing may be limited to an asset purchase, since the Canada Small Business Financing Program does not fund share purchases. Who signs the restrictive covenant and who is bound by it depends on the structure, so it is worth confirming with a lawyer.

Tax is another part of the deal to raise early. Without an election, each property and service in a business sale is treated as a separate supply, so GST (5% in Alberta) can apply to the taxable parts. The buyer and seller can make a joint election under Excise Tax Act s.167 on CRA form GST44, and if it is valid no tax is payable on the supplies under the agreement.

There are limits. The election is not available where the supplier is a registrant and the recipient is not. Even with a valid election, tax is still payable on a taxable service the supplier will render, on a taxable lease, licence or similar supply of property, and, where the buyer is not a registrant, on a taxable sale of real property. If the buyer is a registrant, it must file the election with the Minister by the filing deadline for its first reporting period in which tax would otherwise have become payable, though the Minister may accept a later date on the buyer's application. Whether the election fits your sale is worth confirming with a lawyer or accountant.

What to do next

• Write down exactly what the buyer needs protected and for how long.
• Describe the business activities and the geographic reach as they really are.
• List every person and company that should be bound.
• Have the non-compete reviewed by a lawyer before you sign, whether you are buying or selling.
• Keep a signed copy of the agreement and any schedules.
• Get advice early if a dispute arises, since delays can make a difficult situation harder.

Frequently asked questions