Non-Compete Clauses in Business Acquisitions

Non-compete clauses are a familiar feature of business acquisitions and investments. When used properly, they protect the value of the business being acquired. When drafted too widely, they risk being unenforceable. Recent case law provides some guidance on where the line is drawn.

This article explains what non-compete clauses are, when they will be enforced, how they differ from employment non-competes, and the key practical considerations for buyers and sellers.

What is a non-compete clause?

In the context of a business acquisition, a non-compete clause is a contractual restriction placed on a seller (or key exiting individual) to prevent them from competing with the business they have sold for a defined period after completion.

The purpose is straightforward: the buyer has paid for goodwill, know-how, customer relationships and market position. A non-compete clause seeks to prevent the seller from undermining that value by setting up, joining or supporting a competing business.

Non-compete clauses in purchase agreements are usually accompanied by related restrictions, such as non-solicitation or non-dealing clauses (preventing approaches to customers or suppliers) and employee non-poaching clauses (protecting workforce stability). Together, these covenants are designed to preserve the integrity of the asset acquired.

When will non-compete clauses be enforceable?

Although courts are generally more willing to enforce non-compete clauses in a commercial transaction than in an employment contract, they are still subject to the doctrine of restraint of trade. To be enforceable, a non-compete clause must go no further than is reasonably necessary to protect a legitimate business interest.

In practice, the courts will focus on three core elements:

Scope of activities. The restriction must be tied to the actual business of the target company. Clauses that prevent a seller from engaging in any vaguely related commercial activity, rather than genuine competition, are vulnerable.

Duration. In acquisition contexts, non-compete periods of two to three years are commonly upheld, particularly where goodwill and confidential know-how are being transferred. Longer periods are not automatically invalid, but they require clear commercial justification.

Geographical reach. Restrictions should reflect where the business actually operates, not where it might theoretically operate. A wide territorial restriction will only be upheld if the business genuinely trades across that territory.

The overriding principle is proportionality. The broader the restriction, the harder it is to justify.

Two recent cases

In Literacy Capital Plc v Webb [2024] EWHC 2026 (KB), the High Court refused to enforce non-compete clauses contained in an investment agreement and loan note instrument.

The restrictions lasted for up to ten years, applied across the UK and Channel Islands, and covered a broad range of business activities across the wider group. The court found that:

• the scope went beyond the services actually provided by the company;
• the duration was excessive and unjustified; and
• the geographical reach bore no relationship to where the business operated.

The covenants were therefore held to be void and unenforceable. The case is a clear reminder that even in commercial transactions, courts will not rescue poorly drafted restrictions.

By contrast, Spill Bidco Ltd v Wishart [2025] EWHC 2513 (Comm) demonstrates how well-drafted non-compete clauses can be enforced robustly.

Here, the founder sold a manufacturing group and agreed not to be “engaged in, concerned in or interested in” any competing business for defined periods post-sale. Although he did not formally join competing businesses, he provided loans, introduced suppliers, gave pricing advice and lent credibility to rival ventures.

The court held that:

• the non-compete clauses were reasonable in scope, duration and geography given the size of the transaction and the founder’s personal goodwill; and
• active financial and strategic support for a competing business could amount to being “concerned in” that business, even without formal ownership or employment.

The founder was therefore found to be in breach. The decision confirms that non-compete clauses can capture indirect support and assistance, not just obvious competition.

How acquisition non-competes differ from employment non-competes

Non-compete clauses are often more tightly controlled in employment contracts than in acquisition documents.

In employment law, the courts start from the principle that individuals should be free to earn a living. As a result, employment non-competes are usually limited to senior employees, are narrowly defined, and rarely exceed six to twelve months.

In contrast, acquisition non-compete clauses are assessed in a different commercial context. The seller has typically received significant consideration for the sale and is regarded as having equal bargaining power. As a result, broader restrictions, longer in duration and wider in scope, are more likely to be upheld.

That said, sellers may find themselves subject to overlapping restrictions, for example, under a share purchase agreement, an investment agreement and an ongoing service contract. Each restriction must still be justifiable on its own terms.

Practical commentary and key considerations

From a practical perspective, recent case law reinforces several important points.

For buyers and investors, non-compete clauses should be drafted with precision. Clear definitions of prohibited activities, careful alignment with the target’s actual operations, and a commercially defensible duration significantly increase enforceability. Broad language can be effective, provided it is properly anchored to genuine competition.

For sellers and exiting founders, non-compete clauses should be read literally and cautiously. Activities that feel informal, friendly or indirect, such as lending money, making introductions or offering advice, may still fall within the scope of a restriction. If a non-compete is in force, any involvement with a competing business should be treated as high-risk.

Above all, non-compete clauses are not boilerplate. Getting them right requires careful drafting at the outset and careful behaviour after completion.

If you would like to discuss any of the issues raised in this article, please get in touch.  

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