Seller Non-Compete Clauses in Ontario Business Purchases

If you are paying for a business, you are paying for its customers and goodwill. A seller who sells to you and then opens next door can take that value right back, so most buyers want a non-compete clause in the purchase agreement.

Ontario changed its rules on non-competes in 2021, and the change affects some business sales. This article explains how the rules work, where the exceptions are, and what to check so you can ask the right questions before you sign.

The general ban on non-competes in Ontario

Since October 25, 2021, no employer may enter into an employment contract or other agreement with an employee that is, or includes, a non-compete agreement. A non-compete made in breach of this is void.

The ban is about agreements between an employer and an employee. It matters in a business sale because many sellers stay on after closing to help with the transition, and then the seller is also an employee.

The sale-of-business exception

The ban does not apply to a sale-of-business non-compete if both of these conditions are met:

• As part of the sale of a business or part of one, the buyer and seller agree that the seller will not compete.
• Immediately after the sale, the seller becomes the buyer's employee.

For this rule, a sale includes a lease. The ban applies to agreements between an employer and an employee. How it applies to a seller who walks away at closing and does not become your employee depends on the facts of your deal. That is worth reviewing with a lawyer.

Ontario's guide describes this exception in terms of a sole proprietorship or partnership, although the wording of the section itself does not say so. If the seller is a corporation, or the people you want bound are its owners, confirm the structure with a lawyer so the clause fits the exception.

Other exceptions and older agreements

Executive means a CEO, president, chief administrative officer, chief operating officer, chief financial officer, chief information officer, chief legal officer, chief human resources officer, chief corporate development officer, or any other chief executive position. If you plan to hire the seller or key staff after the deal, how they are classified can decide whether a non-compete can be used.

Drafting a clause that is more likely to be enforced

Whether a non-compete can be enforced depends on the facts of your deal, so it is worth having a lawyer review the clause. The practical points below can help you and your lawyer frame the clause around the business you are actually buying.

• Define the competing business narrowly, matching what was actually sold.
• Choose a time period that reflects how long it would take you to secure the customer relationships.
• Limit the area to where the business really operates.
• Add a non-solicitation clause covering customers and staff as a back-up.
• Tie the clause to the sale and to the goodwill you are paying for, and say so in the agreement.
• If the seller will work for you, confirm they become your employee immediately after closing.

What to do next

Raise the non-compete early, in the letter of intent or offer, rather than after the price is agreed. Decide whether the seller will stay on as an employee, because that affects which rules apply. Ask whether the seller's existing employment or shareholder agreements contain restrictions that matter, remembering that older non-competes are not prohibited by the ban.

Have a lawyer draft or review the clause. Whether a particular restriction is reasonable depends on the facts and on court decisions, and the answer can be different for a corner store and a regional services company.

Frequently asked questions