Non-Competition and Non-Solicitation Clauses When Selling a Business in Ontario

When a business is sold, the buyer is not just paying for assets or shares — they are paying for goodwill: the relationships, reputation, and customer loyalty the business has built. A buyer who pays for goodwill reasonably does not want the seller to walk out the door on closing day and immediately set up a competing operation across the street. That is why non-competition and non-solicitation clauses are standard in Ontario business purchase agreements.

These clauses — often called restrictive covenants — restrict what the seller can do after the deal closes. This article explains how they work, what courts in Ontario will and will not enforce, and how both buyers and sellers should approach the negotiation.

Non-Competition vs Non-Solicitation: The Difference

Non-competition clause: The seller agrees not to carry on a competing business — or work for a competitor — within a defined geographic area, for a defined period of time. For example: "The vendor shall not, for three years following the closing date, directly or indirectly carry on a business that competes with the Business within the Province of Ontario."

Non-solicitation clause: Narrower. The seller agrees not to solicit the customers, clients, or employees of the business for a defined period. The seller may still compete generally — they just cannot actively go after the business's existing relationships.

Buyers typically want both. Sellers typically push to limit both in scope and duration.

When Are These Clauses Enforceable in Ontario?

Ontario courts apply a well-established test when asked to enforce a restrictive covenant: Is it reasonable as between the parties, and not contrary to the public interest?

Reasonableness is assessed on three axes:

1. Duration

How long does the restriction last? Courts have enforced restrictions of three to five years in business sale contexts. Longer periods — say, ten years — may be challenged, particularly if they go well beyond the realistic period needed to protect goodwill. That said, courts apply this test more generously in commercial sale of business contexts than in employment contexts. Sellers are assumed to be sophisticated parties who negotiated the restriction in exchange for fair value.

2. Geographic scope

The restriction must be no broader than necessary to protect the buyer's legitimate interest. A restriction limited to Ontario is more defensible than one covering Canada or North America, depending on the nature of the business. A local plumbing company probably cannot justify a Canada-wide restriction; a national consulting firm might.

3. Scope of prohibited activities

The restriction must clearly define what activities are prohibited. Vague, over-broad clauses are risky. The court looks at whether the restricted activities actually relate to the goodwill being sold. If the clause catches activities far removed from the actual business, it may be unenforceable.

The Sale of Business Context vs Employment Context

This distinction is critical. Ontario courts (and Canadian courts generally) treat non-competition clauses in the commercial sale of a business far more favourably than in the employment context.

In an employment relationship, the employee is the weaker party; courts scrutinize non-competes closely and often strike them down. Provincial legislation has also imposed additional restrictions on non-competes in employment agreements — verify the current state of the Ontario Employment Standards Act, 2000 with a lawyer.

In a business sale, both parties are typically at arm's length, represented by lawyers, and the seller is receiving substantial value for the restriction. Courts recognize that the buyer has a legitimate and significant interest in protecting the goodwill they just paid for. As a result, courts are more willing to enforce restrictive covenants in this context — provided they are still reasonable.

Non-Solicitation of Employees

A separate provision often restricts the seller from hiring away the business's key employees post-closing. This protects the buyer from losing the team that makes the business run. These are usually more narrowly drafted — restricted to employees actually employed by the business at closing — and are typically enforced more readily than broad non-competes.

What Sellers Should Negotiate

Sellers should not simply accept the buyer's first draft. Common points of negotiation:

• Duration: Push for the shortest defensible period. Two to three years is usually reasonable; five years should be justified by the nature of the business and the purchase price.
• Geographic scope: Limit to where the business actually operates. If you only serve Southern Ontario, resist a Canada-wide restriction.
• Carve-outs: The restriction should not prevent you from owning shares in a public company, working in a different industry, or activities clearly unrelated to the business sold.
• Definition of "competition": Make sure it is precise. A vague definition puts the seller at risk of inadvertently breaching the clause by starting something entirely unrelated.
• Consideration: Make sure the purchase price reflects the value of the restriction. Courts are more likely to enforce restrictions where fair consideration was paid.

What Happens If a Clause Is Unreasonable?

Ontario courts have historically been reluctant to "read down" an unreasonable restrictive covenant — that is, to enforce it only to the extent it is reasonable. More recent case law suggests courts may have some flexibility, but this is uncertain. The safer approach is to draft the clause properly at the outset. Do not rely on a court to fix an overreaching clause later.

Frequently asked questions