Non-Compete Clauses When Selling a Business in British Columbia

If you are selling your business, the buyer may ask you to promise not to start or work for a competing business after closing. If you are buying, you probably want exactly that, because part of what you are paying for is the customer base the seller built. The clause is usually called a non-compete, and it often comes with a promise not to solicit customers or staff.

People understandably ask whether these clauses can be enforced. The honest answer is that it depends on the facts and the wording. This article explains how the clause is built, what to think about on each side, and what else in British Columbia law touches a sale.

This article covers the law of British Columbia.

What a sale-of-business non-compete does

The buyer pays for goodwill, meaning the likelihood that customers will keep coming. If the seller could open next door the week after closing, that goodwill could disappear. A non-compete is the buyer's protection against that. It is normally written into the purchase agreement, sometimes as a separate agreement signed at closing.

A non-compete is different from a non-solicitation clause. The first restricts being in the same line of business. The second restricts approaching customers, suppliers or employees. Many agreements use both, and which mix fits a particular sale depends on your situation, so it is worth confirming with a lawyer.

Scope, duration and area

How a restriction applies depends on its exact wording and on the facts of the sale, so it is worth confirming with a lawyer. The three terms below are where most disputes start. A lawyer can explain how British Columbia courts have approached each of them, and how that applies to your business.

There is no formula that sets a safe number of years or kilometres for every business. A corner shop, an online service and a trades company will each justify different terms. How these terms apply to your business depends on your situation, so it is worth confirming with a lawyer before you sign.

Points for sellers and for buyers

• Sellers: read the definition of the competing business carefully. Ask whether you can still work in your field in a role that does not harm the buyer.
• Sellers: check whether the restriction applies if the buyer defaults on payment or you are no longer an owner.
• Buyers: tie the clause to the specific goodwill you are buying, and consider whether you also want non-solicitation terms.
• Buyers: consider whether the key people who hold the customer relationships are the ones signing.
• Both: check which party is bound if the seller is a corporation and the owner is a separate person.

Other rules that sit alongside the clause

A non-compete is one piece of a larger deal, and other British Columbia rules affect how the parties think about it. If the business is a franchise, a franchise resale is a grant under the Franchises Act, including a disposition of shares in the owning corporation. A prospective franchisee must receive the disclosure document at least 14 days before the earlier of signing a franchise agreement or related agreement, or paying consideration relating to the franchise. A franchisee granting a franchise for its own account is exempt from that requirement, but only if the grant is not effected by or through the franchisor.

Every franchise agreement imposes a duty of fair dealing on each party, including acting in good faith and according to reasonable commercial standards when exercising a right such as approving a transfer. A franchisor's right to approve a grant does not by itself mean the grant was effected through the franchisor. The franchise agreement usually sets its own restrictions, so read it alongside the sale agreement.

Employees are another point. If all or part of a business is disposed of, employment is deemed continuous and uninterrupted, and the same applies if the business continues under a receiver or receiver-manager. The purchaser takes on the employer role and must honour the employee's length of service with the seller. In a bankruptcy, however, a trustee's sale can end the employees' rights under the Act, and the purchaser is not liable for wages owed before the bankruptcy. The guidance does not specifically address share sales, but in a share sale the employer corporation does not change, so employment continues with the same employer. There is also an exception: if an employee declines the purchaser's offer and the conditions are not substantially changed, the employee is deemed to have quit.

Tax is also tied to how the price is divided, because sale proceeds are not all taxed as capital gains, and recapture of capital cost allowance must be included in income when the undepreciated capital cost balance is negative. How an amount allocated to the restriction is treated depends on the facts, so an accountant should review it. Provincial sales tax can also depend on the structure: it applies to taxable assets such as affixed machinery and equipment, but not to goodwill, inventory or accounts receivable, and not to the sale of shares of a business.

What to do next

• Write down what the business does, where its customers are and how long it takes to keep them.
• Compare those facts with the scope, duration and area in the draft clause.
• Ask whether a non-solicitation clause would protect the buyer with less restriction on the seller.
• Have an accountant review any price allocated to the restriction.
• Ask a lawyer to confirm how a British Columbia court would likely view the draft before you sign.

Frequently asked questions