What post-closing covenants like non-competes and transition support bind a seller?

BDC describes covenants in a purchase agreement as the actions the buyer and vendor agree to take, both before and after closing, and gives a non-compete as one example. After closing, a seller is bound by the covenants they signed. The agreement may also tie them to an indemnity. Read each covenant for what it restricts, for how long, and what happens if it is broken.

The indemnity behind a covenant

BDC notes that the agreement sets the compensation, or indemnity, the vendor pays if disclosures prove inaccurate or if covenants are not respected. Check whether the same clause covers a breach of the non-compete and transition obligations, whether any of the price is held back as security, and who decides whether a breach has happened.

Non-competes and employment law

Ontario’s Employment Standards Act, 2000 bars an employer from entering an agreement with an employee that is, or includes, a non-compete agreement. Section 67.2(3) sets out an exception where, as part of the sale of a business or part of a business, the purchaser and seller agree that the seller will not compete and, immediately following the sale, the seller becomes an employee of the purchaser. Section 67.2(4) separately exempts executives. Other provinces have their own rules. See how the ban applies on a sale and whether non-competes are enforceable.

Transition support

Training the buyer, introducing customers or staying on for a period are negotiated terms, and no source checked for this page sets them. Ask how long the seller must help, how many hours, whether it is paid, what happens if the seller cannot continue, and whether the seller becomes an employee or a consultant. That last answer can decide which legal rules apply.

How the price is split

Section 68 of the Income Tax Act applies where an amount can reasonably be regarded as consideration in part for a disposition of property, for services, or for a restrictive covenant. The part reasonably regarded as consideration for each is treated accordingly, irrespective of the form or legal effect of the agreement. Section 56.4 defines a restrictive covenant widely, whether legally enforceable or not, and has its own exceptions. A tax adviser should review any amount tied to a covenant.