The Seller's Non-Compete Clause: What It Really Prohibits, and for How Long
A seller's non-compete clause is the commitment, written into the sale agreement, not to rebuild or join for a set period the business you have just sold: the buyer is paying for a customer base and a body of know-how, and wants certainty that the person who embodies both will not put them back on the market against them.
The commitment is legitimate. The trouble is that it gets read last. It arrives in the draft agreement after the price, the warranties and the timetable, drafted by the buyer's counsel in the widest terms available, and by then the seller mostly wants to sign. Picture the founder of a building services firm with 35 employees in the canton of Fribourg, aged 58, selling to a group from western Switzerland; a hypothetical case, not a client. He accepts a clause barring him from "any competing or related activity, directly or indirectly, in Switzerland, for five years". He had two plans for afterwards: a seat on the board of a former supplier, and a stake in his niece's small home automation company. As drafted, both fall under the clause. He finds out a year after closing, when the group writes to tell him.
What the clause covers, item by item
The prohibited activity
Everything turns on the definition. A serious clause refers to the company's actual activity on the closing date: the products and services genuinely sold, the markets genuinely served, ideally listed in a schedule. A broad clause speaks of "similar", "related" or "potentially competing" activities, and the word "related" is the expensive one, because it has no edge. Ask for written carve-outs as well: minority financial holdings without a management role, board mandates in non-competing companies, teaching, publishing, and any activity you already carry on that the buyer knows about.
The territory
The territory should match the real market of the company sold. An installer working across three cantons has no reason to renounce Europe; a component manufacturer exporting 70% of its output reassures nobody with a clause confined to Switzerland. In the mandates I lead, the most useful conversation on this point is to pull out the customer list by country and make the clause coincide with it.
The duration, and above all its starting point
Durations in practice run from two to five years; three is the most common figure. Competition authorities, in Switzerland as in Europe, regard up to three years as proportionate where the sale transfers both customers and know-how, and two years where it transfers customers only; beyond that, a specific justification is needed. The starting point matters as much as the length. "Three years from closing" and "three years from the end of your employment contract" do not describe the same commitment: with a two-year transition, the second binds you for five.
Who is bound
Read what follows your name: "and any company he controls", which is reasonable; "and members of his family", which is not. The agreement cannot bind your daughter or your brother, but it can make you promise to "procure" that they do not compete with the buyer, and that promise is paid for, in contractual penalties, if one of them opens a workshop thirty kilometres away. Confine the commitment to entities you actually control.
The sanction
A clause is only worth what enforces it. In practice that is a contractual penalty, set as an amount per breach or a fraction of the price, sometimes per month of breach; to which are added the right to have the activity stopped and damages for anything above the penalty. What makes the sanction truly formidable is the set-off mechanism that most often goes with it: a buyer who still owes you a vendor loan or an earn-out reserves the right to withhold what they owe the moment they allege a breach. You no longer have to prove you are in the right; you have to prove it in order to get paid.
What Swiss law does, and does not do, for you
Two clauses, two regimes
The Code of Obligations tightly frames an employee's non-compete: written form, limits of place, time and type of business, three years at most save in special circumstances, reduction by the court, and lapse if the employer terminates without a reason attributable to the employee. Those protections apply to the employment contract you will sign if you stay in the company after the sale. They do not apply to the clause in the sale agreement, which falls under general contract law: no statutory cap on duration, and courts more tolerant towards a seller than towards an employee, because the price paid for the goodwill justifies a wider restriction. A seller who stays on as an employee of the former company therefore signs two clauses, and the lapse of the first does not touch the second.
An excessive clause is not void, it is cut down
A commitment that restricts your economic freedom beyond what is reasonable can be reduced by a court to an admissible measure, in duration, territory or scope. That is not a protection to build on: two years of proceedings to learn what you could have done from day one. The admissible measure is far better written by the two parties, before signing.
A clause that prohibits everything does not protect the buyer better. It only makes litigation more likely.
How to frame it before you sign
The right moment is the letter of intent. The principle of a non-compete is almost always in it; the duration and the territory can be too, in a single line, before the standard text from the other side's counsel arrives with the draft agreement. It is one of the lines you draw before the first offer, and it negotiates more easily early, while it still costs the buyer nothing.
Then draw up your own list of what must remain possible. The board mandates you have in mind, including with former partners; the holdings you own or are considering; your spouse's activity if it touches the sector; the property company if you keep the premises; occasional consulting in your trade. Each item on that list becomes a written carve-out or a narrowing of scope. Whatever is not on it is deemed prohibited.
Finally, tie the clause to what you receive. A non-compete that survives intact when a buyer stops paying the deferred price is out of balance; it is accepted practice to negotiate that it falls away or shortens in that case. The non-solicitation of employees, often bundled with the clause, is better made mutual: the buyer should not poach the team of your next venture either. And sign the clause with the same attention as the warranties that sit beside it in the same document: they arrive at the same moment, at the same hour of fatigue.
Why it fails
It fails first through vagueness. "Similar", "related", "directly or indirectly" with no definition attached produce, two years on, an exchange of lawyers' letters from which nobody emerges a winner. It fails next through forgetting: the seller accepts, in month eighteen, a mandate with a former supplier that has just launched the very activity sold, without rereading what he signed. It fails through a misread starting point, through family bound without knowing it, and through the use a buyer eager to renegotiate an earn-out makes of it: an alleged breach is a convenient lever on a price still owed.
The clause says, in negative, what you sold: customers and know-how that lived in you. The buyer's fear is well founded; your plans for the years that follow are just as legitimate. Both fit into three precise lines, provided they are written while the conversation is still calm. A well-drafted clause can be recognised by this: three years later, nobody has needed to reread it.