Non-Compete Clause

A contractual restriction preventing a seller from operating a competing business within a specified geographic area and time period after a sale.

Example

A non-compete clause bars the seller from opening a similar shop within five miles for eighteen months after closing.

Important

Its real protective value depends entirely on its actual scope and enforceability in the relevant jurisdiction, not on its mere presence in the contract - some jurisdictions limit non-compete enforceability significantly.

Related terms

• Goodwill — The residual value of a business purchase left over once tangible assets are valued and liabilities assumed are subtracted, representing customer relationships, reputation and other intangible value expected to transfer to the new owner.
• Key-Person Risk — The risk that a business's earnings depend heavily on one specific individual's relationships, judgement or reputation, and will not survive their departure intact.

Lessons that explain it

• Appraising one business: verify the earnings before you price anything else — Seven checks on one specific listing, in an order that puts verifying the earnings ahead of everything the earnings are used to justify - because every other number in the deal is built on top of a figure the seller had every reason to shape. (13 min)
• Franchise royalties and goodwill amortisation both compound quietly over the holding period — Beyond key-person and concentration risk, a small-business purchase carries recurring costs and tax treatment that materially change the price a buyer can justify and the return a seller actually keeps - none of which shows up in a headline SDE multiple. This lesson is general information, not personal tax or legal advice, and rules vary by jurisdiction. (12 min)

All 578 terms in the Investing glossary