A non-competition covenant on a business sale is enforceable in Ontario, but only if it is drafted to protect the goodwill the buyer paid for and no further. Courts do not rewrite covenants that go too wide. They strike them out and the buyer gets nothing.
Our charges include applicable taxes. Disbursements are extra and billed at cost — itemized upfront, in writing, never hidden.
From $3,388.87 taxes included
The starting point is that a covenant restraining trade is unenforceable unless it is reasonable. But reasonableness is assessed in context, and a covenant given by someone who has just sold a business for value is treated far more generously than one imposed on an employee. The seller was paid for the goodwill, and the buyer is entitled to protect what it bought.
Reasonableness is tested on three axes: what activity is restricted, where, and for how long. Each has to be justified by the business as it actually was at closing — the trades it carried on, the territory it genuinely served, and the time a buyer needs to make the customer relationships its own. A restriction wider than the business is not protecting goodwill.
Ambiguity is fatal. A covenant that fails to define its territory, or that bars "any competing business" without saying what the business is, falls over not because it is too broad but because nobody can tell what it means. Courts generally will not read down or blue-pencil a covenant into something enforceable, particularly where both sides had legal advice.
So the drafting has to be specific: named activities, a described geographic area tied to where the business actually traded, a term measured in years, and a defined start date — usually closing, or the end of the seller's post-closing employment, whichever is later. Say which one, in the agreement.
Ontario prohibits non-compete agreements between an employer and an employee. Under the <a href="https://www.ontario.ca/laws/statute/00e41">Employment Standards Act, 2000</a>, an employer must not enter into an employment contract or other agreement with an employee that is, or includes, a non-compete agreement, and one entered into in breach of that prohibition is void.
Two exceptions matter here. The first is the sale of a business: where, as part of the sale, buyer and seller agree that the seller will not compete with the buyer's business after the sale, and the seller becomes an employee of the buyer immediately following the sale, the prohibition does not apply to that agreement. The second is for executives: the prohibition does not apply to an employee who holds the office of chief executive officer, president, or another chief officer or chief executive position.
The practical consequence is about where the clause sits. A vendor covenant in the purchase agreement, given in exchange for the purchase price, is a sale covenant. The same restriction dropped into the seller's post-closing employment contract, or extended to other employees who sold nothing, is a different animal — and for ordinary employees it is void.
Retained employees are the common mistake. A buyer that asks the seller's staff to sign non-competes as a condition of continued employment achieves nothing, because those agreements are prohibited. Non-solicitation and confidentiality covenants are not prohibited, and they are what should be used with employees instead.
Most sellers do not open a competing shop across the street. They take the customers with them, quietly. A non-solicitation covenant — no approaching the business's customers, no poaching its employees, no going around it to its suppliers — targets that directly, and is easier to justify and enforce than a broad ban on competing at all.
Define who the customers are. A named list, or customers the business dealt with during a stated period before closing, is enforceable in a way that "any customer" is not. Do the same for employees: those employed at closing, for a stated period, and say whether responding to a public job advertisement counts as solicitation.
Confidentiality is separate again and is not limited the same way. Pricing, supplier terms, formulas, customer data and know-how can be protected indefinitely without the reasonableness problem that restraint-of-trade covenants face. Many small-deal disputes are really confidentiality disputes wearing a non-compete label.
Tax has a say too. Amounts received for a restrictive covenant are, by default, ordinary income to the seller under the <a href="https://laws-lois.justice.gc.ca/eng/acts/I-3.3/">Income Tax Act</a> rather than proceeds of a capital asset, unless an exception or joint election applies. Allocating a separate slice of the price to the non-compete is usually a bad idea. Our fee for a straightforward purchase or sale starts at $3,388.87, taxes included — <a href="/pricing">see pricing</a>.
There is no fixed limit. The term has to be justified by how long the buyer needs to make the customer relationships its own, which depends on the industry, the length of the sales cycle, and how personal the goodwill was. Terms in the two to five year range are common on owner-operated sales. Longer needs a reason.
The ban applies to agreements between an employer and an employee. A covenant given by a seller in a purchase agreement, in exchange for the purchase price, is not that. There is also an express exception where the seller becomes an employee of the buyer immediately after the sale, and a separate exception for executives.
A non-competition covenant stops the seller carrying on a competing business at all. A non-solicitation covenant stops the seller approaching the customers, employees and suppliers of the business sold. Non-solicitation is narrower, easier to justify and easier to enforce, and in most small deals it protects the thing the buyer actually paid for.
Move quickly. The usual remedy is an injunction stopping the competing activity, plus damages, and the agreement should say expressly that damages alone are an inadequate remedy. If part of the price is still held back or payable under a vendor note, the agreement should let you set off against it. Delay weakens an injunction application.
Usually not, without tax advice. Amounts received for a restrictive covenant are by default ordinary income to the seller rather than proceeds of a capital asset, so a separate allocation can produce a tax bill the seller never expected. Elections and exceptions exist, but they carry conditions. Decide this before signing, not after.
Open your file tonight — a licensed Ontario lawyer will confirm everything with you by tomorrow.