Non-compete and customer protection after a business sale in Austria

With the company the acquirer buys the economic sources of its future value creation. Alongside fixed assets and contracts this includes above all customer relationships, market reputation and the knowledge of the workforce. These intangible values are particularly fragile without active protection, because they often depend on individuals, above all the previous owner and the key employees.

The non-compete therefore secures what is most directly at risk: the option of the seller to approach the same customer base again immediately. By undertaking towards the buyer not to engage in competition in a defined substantive and geographic area for a certain period, the seller gives the buyer the time to consolidate the acquired relationships.

Customer protection and non-solicitation add to the picture. The customer protection prohibits the targeted approach of existing or recently lost customers, the non-solicitation protects against the loss of key employees. Both also operate where the actual non-compete does not bite, for example because the seller moves into another region or an adjacent industry. We explain the concept of the non-compete in the glossary.

An effective clause must limit the protection to what is necessary for the protection of the acquired goodwill. Substantively the acquired business field belongs in the prohibition: the activities actually carried out and the products or services that the business offers in the market. An extension to neighbouring fields is possible where the buyer is already actively present there or has credibly prepared an expansion.

Geographically the clause orients itself to the actual market area of the company. For a regionally anchored operation a narrowly defined area often suffices, for businesses operating regionally or internationally a wider reach is conceivable. A blanket extension to the entire EU area should be underpinned by actual market presence, otherwise it goes nowhere.

Temporally a period of two to three years from completion is frequently agreed. A significantly longer period needs justification and can be wholly or partly ineffective under Austrian law. If a longer protection cannot be plausibly justified, the measured period is the better one because it actually holds. How completion conditions influence the start of the period is explained in the post on closing conditions.

A non-compete clause only has practical value if a breach quickly becomes tangible. A quantified contractual penalty per individual breach is therefore usual. It relieves the buyer of having to quantify every single loss in concrete terms and makes the economic pressure visible immediately in dispute. An additional claim for further damage remains possible where it can be shown.

In addition the contract should expressly provide for the injunctive remedy and for interim relief. A clear contractual promise makes it easier in urgent cases to obtain an interim order against the seller ongoing activity. Whoever has to run only the main proceedings without these tools often loses the decisive months in which the customer base is just reorganising itself.

For the evidence cleanly documented handovers from the preparation phase help. Anyone who records customer lists, sales territories and key contacts at completion can later more easily prove targeted approaches by the seller. An initial assessment of the risks of your transaction is provided by our M&A transaction risk profile.

If the seller remains as adviser or managing director of the business, the situation changes. During that time corporate or contractual duties of loyalty towards the company already apply, an additional non-compete works above all for the time afterwards. It is therefore sensible to link the non-compete expressly to the end of the advisory role and tie it back to completion.

On an earn-out an additional consideration applies: where part of the purchase price depends on future earnings, the seller has an interest in the business of the company. A parallel competing activity would undercut that interest. It is therefore usual to provide the non-compete at least for the entire earn-out period, often with an appropriate follow-on period as well.

Finally the clause has to be aligned with the warranty catalogue. A warranty on continuing customer relationships only works if the seller does not destroy those relationships through its own follow-on activity. How the catalogue is built is shown in the post on the warranty catalogue.