What it means
The commercial logic is straightforward. A company that trains staff, shares client lists and hands over pricing knowledge does not want that person walking across the street the following month, so it asks for a period of restraint in exchange for the job or the purchase price.
Courts, however, treat restraints on someone's ability to earn a living with suspicion. The usual test is reasonableness: the restriction must protect a legitimate business interest, and must be no wider than necessary in duration, geography and scope of activity.
Enforceability varies dramatically by jurisdiction. Some places will not enforce employee non-competes at all, some require the employer to keep paying the former employee during the restricted period, and others will enforce a narrowly drawn clause but strike out an overreaching one entirely rather than rewrite it.
The strongest version by far is the non-compete given by the seller of a business. Here both sides are commercial parties, the seller has been paid for goodwill, and courts generally accept that the buyer would receive nothing of value if the seller could immediately reopen next door and take the customers back.
It is worth separating the non-compete from its cousins. A non-solicitation clause only stops someone approaching specific clients or staff, and a confidentiality clause only protects information, so both are narrower, easier to defend and often achieve most of what the business actually needs.
Garden leave is a further alternative used in senior appointments. The employee stays on the payroll but away from clients and systems for part of the notice period, which keeps them out of the market without asking a court to restrain someone the employer is no longer paying.
In practice
Real-world examples
Example 1
A recruitment firm asks a senior consultant to accept a six-month restriction on working for competing agencies in the same city. When she resigns, the firm reviews the wording with its lawyers and concludes that the twelve-month version it had also considered would probably have been struck down as excessive, leaving it with nothing at all.
Example 2
The owner of a specialist packaging business sells for a price that reflects three decades of customer relationships. The purchase agreement includes a three-year non-compete across the region, and part of the consideration is formally allocated to that covenant as an intangible asset, which the buyer then amortises over the three years the restriction runs.
Example 3
A dental practice group buys a suburban surgery and requires the departing principal to accept a five-mile, three-year restriction. Without it, patients would simply follow the dentist to a new premises and the goodwill the group paid for would evaporate within a single year. The restriction is what makes the price defensible to the group's own lenders.
Think of it
Think of a non-compete agreement like a football player's transfer clause. If a star player learns the team's secret playbook, the club insists they cannot immediately join their fiercest local rival and use those exact tactics against them.
Case study
Seen in the real world
Verity Dental Group is a fictional business used purely for illustrative purposes. It acquires a well-established two-surgery practice for $1,800,000, of which roughly $1,300,000 reflects goodwill built on patient loyalty to the founding dentist rather than on premises or equipment.
The sale agreement contains a three-year non-compete covering a five-mile radius, plus a two-year non-solicitation clause preventing the seller from contacting patients directly. The seller's lawyer negotiates the radius down from fifteen miles, arguing that patients rarely travel that far and that a wider restriction would be unenforceable anyway. Both sides accept the narrower version, which is more likely to survive a challenge precisely because it is proportionate.
Eighteen months later the seller opens a cosmetic clinic well outside the radius, offering treatments the acquired practice never provided, and the group takes no action. Its finance director notes that patient numbers at the acquired surgery have held steady, which was the whole point of the covenant. The illustrative lesson is that a tightly drawn clause protected the thing that was actually bought, while a sweeping one would have invited a fight the group might well have lost, and would have delivered no extra commercial protection in return.
Watch out
Common mistakes
- Copying a lengthy non-compete from a template without tailoring the duration, geography and activities to what the business genuinely needs to protect.
- Assuming a signed clause is automatically enforceable, when many jurisdictions will refuse to enforce restraints they consider excessive.
- Reaching for a non-compete when a non-solicitation or confidentiality clause would protect the real interest with far less legal risk.
Questions
People also ask
Why are non-competes on business sales easier to enforce?
Because the seller has been paid for goodwill, and without the restraint the buyer could lose the very asset it purchased.
Does a non-compete have any accounting consequence?
Yes, on an acquisition part of the purchase price may be allocated to the covenant as an intangible asset and amortised over its life.
Can an employer enforce a non-compete after making someone redundant?
Often not, since courts are reluctant to restrict someone the employer chose to dismiss, though this varies by jurisdiction and contract wording.