--- title: "Noncompetes in Business Sales: FTC Status and Deal Review" description: "The FTC's 2024 Noncompete Rule is not in effect. Learn how sale-of-business restrictions are reviewed, how sellers, retained employees and rollover owners differ, and what to check before signing." canonical: "https://acquisitionstars.com/blog/non-compete-agreements-business-sales" author: "Alex Lubyansky" firm: "Acquisition Stars" practice: "M&A and securities law" office: "Novi, Michigan (serves clients nationwide)" contact: "consult@acquisitionstars.com | 248-266-2790" --- # Noncompetes in Business Sales: FTC Status and Deal Review If you're selling your business, the non-compete agreement might be the most consequential document you sign - **other than the purchase agreement itself.** Most content about non-competes in business sales is written for buyers. It tells buyers how to lock sellers down, protect their investment, and enforce restrictions. That's useful - for the other side of the table. This guide is written for sellers. It sets out what to review in the restriction, who is bound by which agreement, and which questions to put to counsel. Here's how to sign a non-compete that protects the buyer's legitimate interests - *without sacrificing your future.* This article is part of the [Employment Law in M&A: Legal Guide for Buyers and Sellers](https://acquisitionstars.com/blog/employment-law-ma-legal-guide), which covers the full spectrum of employment and benefits obligations that arise in acquisitions - from non-compete and non-solicitation agreements to WARN Act compliance and employee benefits plan transitions. ## 1 Why Every Buyer Demands a Non-Compete Before negotiating your non-compete, understand why the buyer cares so much. It's not just legal boilerplate - it's the mechanism that protects what they're actually paying for. ### Goodwill Protection The buyer paid a premium above asset value for your customer relationships, reputation, and brand. Without a non-compete, you could walk across the street and take it all back. ### Lender Requirement SBA lenders and banks commonly require a seller noncompete as a loan condition. ### Deal Insurance The non-compete is the buyer's insurance policy against the single biggest risk in any acquisition: the seller becoming their most dangerous competitor. Seller's Perspective Understanding the buyer's motivations isn't just empathy - it's strategy. When you know *why* each provision exists, you can negotiate targeted modifications that address the buyer's concern without unnecessarily restricting your future. The goal isn't to eliminate the non-compete. It's to make it **precisely as broad as it needs to be - and not one inch broader.** ## 2 Business Sale vs. Employment Non-Competes: A Critical Distinction The FTC's 2024 Noncompete Rule is not in effect. Its status does not change how a sale-of-business covenant is reviewed. State law treats a covenant given by the seller of a business differently from an employment noncompete, and the two should not be confused. | Factor | Business Sale Non-Compete | Employment Non-Compete | | --- | --- | --- | | Enforceability | Depends on the governing state's law and the covenant's terms | Varies by state; several states restrict or void most employment noncompetes | | California | Permitted for a seller of goodwill within a specified area ([section 16601](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=16601.&lawCode=BPC)) | Generally void ([section 16600](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=16600.&lawCode=BPC)) | | [FTC 2024 Rule](https://www.ftc.gov/legal-library/browse/rules/noncompete-rule) | Rule not in effect; its text contained a sale-of-business exception | Rule not in effect (FTC status page) | | Consideration | Purchase price (substantial) | Continued employment (often deemed insufficient) | | Bargaining Power | Arm's-length negotiation between equals | Employer has inherent leverage | | Court Scrutiny | Reviewed for reasonableness in relation to the goodwill sold | Reviewed under the state's employment noncompete standard, often more strictly | | Duration | Negotiated; reviewed for reasonableness under governing law | Negotiated; often reviewed more strictly than a sale covenant | Attorney Insight Do not assume that recent noncompete reforms decide a sale covenant either way. The FTC rule is not in force, California's statute contains a specific sale-of-business provision, and other state statutes vary. Negotiation leverage comes from the deal terms and the governing law, not from a general rule. ## 3 Who Is Bound: Seller, Retained Employee or Rollover Owner One transaction can create three different restrictions on the same person. A seller signs a covenant in the purchase agreement. A seller who stays on signs another in an employment or consulting agreement. A seller who takes equity in the buyer can be bound by the buyer's governing documents. Use this worksheet to record each restriction separately before signing. It is a discussion aid, not model contract language. | Who is bound | Restriction and agreement | Activity, territory and duration | Interest protected | Link to employment or future acquisitions | Question for counsel | | --- | --- | --- | --- | --- | --- | | Seller | Noncompete, customer and employee nonsolicitation and confidentiality, in the purchase agreement or a separate restrictive covenant agreement signed at closing. | Defined by the products, services and markets of the business actually sold; duration negotiated in the deal. | The goodwill the buyer paid for. | Usually runs from closing and does not depend on later employment. | Which law governs, does the covenant match the business sold, and what happens if the buyer fails to pay deferred consideration? | | Retained employee | Employment noncompete, nonsolicitation and confidentiality, in an employment or consulting agreement. | Tied to the role and the employer's business, for a period after employment ends. | The employer's confidential information, customer relationships and workforce. | Runs from the end of employment; reviewed under state employment noncompete rules, which can be stricter or require notice or consideration. | Is this restriction analyzed as an employment covenant, a sale covenant or both, and does the state statute treat them differently? | | Rollover owner | Covenants in the operating agreement, shareholders agreement or contribution documents, often tied to holding the equity. | May last while the equity is held plus a tail period and may cover the buyer group's other businesses. | The value of the group in which the owner now holds equity. | Can extend to businesses acquired after closing and can interact with vesting, repurchase and leaver terms. | Does the restriction grow with each later acquisition, and what happens on a repurchase or exit? | A buyer should also record these rows. A buyer who relies on a seller's covenant to protect goodwill needs to know which agreement contains it, which law governs it and whether a retained owner's employment covenant is being counted twice. ## 4 State-by-State Enforceability: What Matters for Sellers Sale-of-business covenants are reviewed under state law, and the review differs by state. Here is a general orientation, not a survey of every state. ### California Enforceable for Business Sales **The rule:** California generally voids restraints on trade ([section 16600](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=16600.&lawCode=BPC)), which has statutory exceptions, including one for a person who sells the goodwill of a business ([section 16601](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=16601.&lawCode=BPC)). A full sale of a business, including goodwill, can support a noncompete limited to the geographic area where the business was conducted. **Partial sales:** California courts apply a "rule of reason" test for partial sales (selling LLC membership interests, for example), balancing the restriction against the seller's ongoing involvement and fiduciary duties. ### Partial or Minority Equity Sales Scrutiny Can Vary **The general pattern:** Some courts apply closer scrutiny to a covenant tied to a partial or minority equity sale, where the seller's ongoing involvement or access to confidential information was limited, than to a covenant tied to a full sale of the business. **What to check:** Whether a partial sale supports the same restriction as a full sale depends on the governing law and the facts of the transaction. Ask counsel whether the covenant is proportionate to the interest actually sold. ### Narrowing an Overbroad Covenant One Possible Approach **The general pattern:** Some courts narrow an overbroad covenant to what is reasonable rather than refusing to enforce it, so a restriction can still apply in modified form even where part of it exceeds what protects the goodwill sold. **What to check:** The governing law and the covenant's own severability terms decide whether narrowing is available. Do not assume it will be. ### Voiding an Overbroad Covenant Another Possible Approach **The general pattern:** Other courts treat an unreasonable covenant as unenforceable in its entirety rather than rewriting it. An overbroad restriction can fail completely under this approach. **What to check:** The governing law and the covenant's own severability terms decide which approach applies. Confirm this with counsel rather than relying on an assumption from a different state. Governing Law Matters The purchase agreement typically specifies which state's law governs the noncompete. This choice-of-law provision can be as important as the covenant's own terms. Both the buyer and the seller should confirm which state's law applies and how that state treats sale-of-business covenants, rather than assuming the covenant will be read the same way everywhere. ## 5 Tax Treatment: How the Non-Compete Allocation Affects Both Parties Here is what sellers and buyers should understand before tax time: how the purchase price is allocated to the covenant affects the tax treatment for both parties. #### For the Buyer Under [26 U.S.C. section 197](https://www.law.cornell.edu/uscode/text/26/197), a covenant not to compete entered into in connection with acquiring a trade or business is a section 197 intangible, amortized over 15 years regardless of the covenant's actual duration. #### For the Seller Payments allocated to the covenant are generally treated as ordinary income, not as gain on the sale of goodwill. The allocation between goodwill and the covenant is negotiated and reported by both parties, and there is no standard percentage. Attorney Insight The purchase price allocation is a **negotiation point**, not a fixed formula. A buyer generally prefers a higher allocation to the covenant because it increases deductible amortization; a seller generally prefers a lower allocation because covenant payments are taxed as ordinary income. Your M&A attorney and CPA should coordinate on this allocation *before* the letter of intent stage, and both parties should get independent tax advice. ## Put the restriction in front of counsel before you sign Tell us whether you are buying or selling, which agreement contains the restriction, and when you expect to sign. Scope and availability are confirmed before an engagement begins. [Request Engagement Assessment](https://acquisitionstars.com/consultation) [Business Acquisition Attorney Services](https://acquisitionstars.com/services/mergers-acquisitions) ## 6 The Seller's Negotiation Playbook: 8 Strategies That Work Every non-compete provision is negotiable. Here are eight strategies we use to protect sellers - without killing the deal. 1 ### Limit the Activity Scope to What You Actually Sold If you sold a plumbing company, the non-compete should cover plumbing - not "construction services" or "home services" broadly. Push for specific NAICS codes or detailed activity descriptions rather than vague industry categories. Instead of: "Seller shall not engage in any business competitive with the Business" Negotiate for: "Seller shall not engage in residential and commercial plumbing services within [territory]" 2 ### Carve Out Passive Investments A common carve-out permits passive holdings of a small percentage of a publicly traded company, even a competitor. The threshold is negotiated. For private investments, negotiate specific carve-outs for industries adjacent to (but not directly competing with) the sold business. 3 ### Tie Geography to Actual Operations If the business serves customers within 100 miles of Chicago, a nationwide restriction is overkill. Propose listing the specific counties or metropolitan areas where the business has active customers - and restrict only those. 4 ### Negotiate Duration Against Price Allocation Duration and price allocation are often negotiated together. Changing one changes the tax and protection consequences of the other: a longer duration paired with a lower allocation to the covenant gives the buyer more protection while shifting more of the price into goodwill for the seller. Work through both with your attorney and CPA as a single decision. 5 ### Get Specific Carve-Outs for Your Next Chapter Planning to consult, teach, write, or invest after the sale? Get explicit carve-outs in writing. Common ones: consulting in non-competing industries, teaching at educational institutions, writing or speaking about the industry, and investing as a limited partner in private equity funds. 6 ### Link Non-Compete to Buyer's Payment Obligations If the buyer defaults on installment payments, seller financing, or earnout obligations, the non-compete should terminate. This prevents a scenario where the buyer stops paying you *and* you're still restricted from working in your industry. 7 ### Address the Online/Remote Business Problem For SaaS, e-commerce, or remote service businesses, traditional geographic restrictions are meaningless. Instead, negotiate restrictions based on **customer lists, specific market segments, or named competitors** - not geographic boundaries that could effectively mean "nowhere on the internet." 8 ### Coordinate with Your Earnout and Consulting Agreement If your deal includes an [earnout](https://acquisitionstars.com/blog/earnout-agreements-explained), the non-compete and earnout should be negotiated as a package. A strict non-compete protects *your* earnout by preventing the buyer from claiming you competed away the performance targets. Conversely, if you have a consulting agreement, ensure the non-compete doesn't prohibit the activities you're being paid to perform. ## 7 How Non-Competes Interact With Earnouts and Consulting Agreements In modern M&A deals, the non-compete rarely exists in isolation. It's intertwined with earnout provisions, consulting agreements, and transition services. Getting one wrong can undermine the others. NON-COMPETE #### Protects the Deal - →Prevents seller from competing away business value - →If violated, triggers earnout forfeiture - →Should terminate if buyer defaults on payments EARNOUT #### Protects the Seller - →Deferred compensation tied to performance - →Non-compete prevents buyer from sabotaging targets - →Should specify that non-compete breach forfeits earnout CONSULTING #### Creates Tension - →Seller is paid to stay involved in the business - →Non-compete must not prohibit consulting duties - →Reinforce non-compete by keeping seller aligned The Integration Rule Never negotiate the non-compete, earnout, and consulting agreement in isolation. A change to one affects the others. Your M&A attorney should review all three as a **single integrated package** - because the buyer's attorney certainly will. ## 8 What Exactly Gets Restricted? A Complete Breakdown Most non-competes include multiple types of restrictions bundled together. Here's what each one means for your post-sale life. ### Non-Competition Primary Restriction **What it restricts:** Owning, operating, managing, or being employed by a competing business within the restricted territory and time period. **What to watch for:** Overly broad definitions of "competing business." Push for specific industry codes or activity descriptions, not vague language like "any business similar to the Business." ### Non-Solicitation of Customers Standard Provision **What it restricts:** Actively reaching out to the sold business's customers to divert them to a competitor or new venture. **What to watch for:** The difference between "solicitation" (you reaching out) and "servicing" (a customer independently approaching you). Negotiate language that only restricts active solicitation - not responding to unsolicited inbound requests. ### Non-Solicitation of Employees Common Provision **What it restricts:** Recruiting, hiring, or inducing employees of the sold business to leave for a competing venture. **What to watch for:** Overly broad definitions. Does the restriction cover employees who were hired *after* you sold the business? It shouldn't. Limit the restriction to employees who were there at the time of closing. ### Confidentiality / Non-Disclosure Often long-term or indefinite **What it restricts:** Using or disclosing trade secrets, customer lists, pricing information, proprietary processes, and other confidential information of the sold business. **What to watch for:** Unlike non-competes, confidentiality provisions often have **no expiration date**. This is generally acceptable - but make sure the definition of "confidential information" doesn't include your general industry knowledge and skills. ### Non-Disparagement Often Overlooked **What it restricts:** Making negative statements about the sold business, its new owner, products, or services to customers, employees, or the public. **What to watch for:** Make sure this is **mutual**. The buyer shouldn't be able to disparage you either - especially if you're well-known in the industry and your reputation is part of your post-sale identity. ## 9 Pre-Sale Non-Compete Checklist: 12 Questions to Ask Before You Sign Before signing any non-compete, walk through each of these questions with your M&A attorney. If you can't answer all twelve, you're not ready to sign. 1 What specific activities are prohibited? Get an exhaustive list - not vague categories. 2 What's the exact geographic scope? Counties, states, or the entire U.S.? 3 How long does the restriction last? Is it tied to the goodwill being protected? 4 What's the purchase price allocation to the non-compete? This determines your tax treatment. 5 Is there a passive investment carve-out? The threshold is negotiated. 6 Do I have carve-outs for my planned post-sale activities? Consulting, teaching, writing, advising? 7 What happens to the non-compete if the buyer defaults? Should terminate if payments stop. 8 How does the non-compete interact with my earnout? Breach triggers and forfeiture provisions. 9 Which state's law governs enforcement? Blue pencil vs. all-or-nothing state matters. 10 What are the enforcement remedies? Injunctions, damages, liquidated damages? 11 Is the non-disparagement clause mutual? Your reputation needs protection too. 12 Does the non-solicit cover only current employees/customers? Should not restrict people hired/acquired after closing. ## Don't Sign a Non-Compete Without Your Own Attorney The other side's attorney drafted the covenant to protect the other side. Review it with your own M&A counsel before signing, whether you are the buyer relying on it or the seller bound by it. Since 2013 M&A Experience Nationwide Transaction Counsel Direct Partner Access [Request Engagement Assessment](https://acquisitionstars.com/consultation) Alex Lubyansky leads every engagement ## Frequently Asked Questions **Are noncompete agreements enforceable in business sales?** Often, but not automatically. Courts and statutes in many states treat a restriction given by the seller of a business differently from an employment noncompete, because the buyer paid for goodwill. California is one example: Business and Professions Code section 16601 permits a person who sells the goodwill of a business to agree not to carry on a similar business within a specified area, while section 16600 voids most other restraints on trade. Whether a particular covenant is enforced still depends on the governing law, the seller's role, the goodwill transferred and whether the activity, territory and duration are limited to what protects that goodwill. Have counsel review the applicable statute and case law before signing. **How long can a business sale noncompete last?** There is no fixed rule. Duration is negotiated together with the price, the seller's continuing role and any deferred payments. A court reviewing the covenant asks whether the duration is reasonable in relation to the goodwill it protects under the governing law. Reported decisions vary by state, industry and transaction, so this guide does not state a standard term. Ask counsel how the proposed duration fits the business's customer relationships and the buyer's transition needs. **Does the FTC noncompete rule apply to business sales?** The FTC's 2024 Noncompete Rule is not in effect. The FTC's status page states that the rule is not in effect and not enforceable, that a district court stopped enforcement on August 20, 2024, and that on September 5, 2025 the FTC took steps to dismiss its appeal. The rule's text included an exception for noncompetes entered into with a bona fide sale of a business, but because the rule is not in force that exception does not decide anything. Enforceability of a sale-of-business covenant is a question of state law and the terms of the covenant. **How does a noncompete affect the purchase price and taxes?** Part of the price may be allocated to the covenant for tax reporting, and that allocation affects both parties. For the buyer, a covenant not to compete entered into in connection with acquiring a business is a section 197 intangible amortized over 15 years. For the seller, payments for a covenant are generally treated as ordinary income rather than as gain on the sale of goodwill. The allocation is negotiated and reported by both parties. There is no standard percentage. Obtain tax advice on the allocation before agreeing to it. **Can I negotiate the terms of a non-compete when selling my business?** Terms such as duration, territory, restricted activities, carve-outs and price allocation are typically negotiated together with the rest of the deal, not accepted as drafted. Common points sellers raise include limiting the geographic scope to areas where the business actually operates, carving out passive investments, excluding unrelated business activities, and requesting specific carve-outs for consulting, teaching, or investing in non-competing industries. A seller who has counsel reviewing the covenant before the purchase agreement is signed has the most room to negotiate these terms. **What happens if I violate a non-compete after selling my business?** Consequences for violating a business sale non-compete can be severe: the buyer can seek an injunction (court order to stop competing immediately), monetary damages for lost revenue and goodwill, forfeiture of earnout payments, clawback of deferred purchase price payments, and in some cases, liquidated damages specified in the agreement. Courts take business sale non-compete violations seriously because the seller received substantial payment specifically in exchange for not competing. **How is a business sale non-compete different from an employment non-compete?** The usual reasons are that the seller received the purchase price as consideration, the restriction protects goodwill the buyer paid for, and the parties bargained over the terms with counsel. Those reasons support a more permissive review in many states, but they do not make every sale covenant enforceable. Statutes that restrict employment noncompetes sometimes contain separate provisions for sale-of-business covenants. Check the current statute for the governing state rather than assuming an exception exists. **What geographic scope is reasonable for a business sale non-compete?** The geographic scope should match the business's actual operating territory - where it has customers, employees, or market presence. For a local service business, this might be a limited radius around its operating area. For a regional company, the scope could cover multiple states. For businesses with national or online operations, a nationwide restriction may be justified. Courts have struck down restrictions that extend beyond the seller's 'competitive sphere' - the geographic area where they could actually damage the buyer's business. **Should I have my own attorney review the non-compete before signing?** Yes, without exception. The non-compete is one of the most consequential provisions in the entire transaction for you as the seller - it determines what you can and cannot do professionally for years after closing. Your M&A attorney should review the scope of restricted activities, geographic limitations, duration, carve-outs you need, interaction with earnout provisions, tax allocation implications, and enforcement remedies. Never sign a non-compete drafted solely by the buyer's attorney without independent review. **How do non-competes interact with earnout agreements?** Non-competes and earnouts are deeply intertwined. If the seller has an earnout (deferred purchase price contingent on business performance), violating the non-compete typically triggers earnout forfeiture. Conversely, if the buyer structures the deal with a large earnout, a strict non-compete protects the seller's ability to earn that payout by preventing the buyer from claiming the seller 'competed away' the earnout targets. Both provisions should be negotiated together as a package, not independently. **Are a retained owner's employment noncompete and the sale noncompete the same restriction?** No. A seller who stays on as an employee can be bound by a sale covenant in the purchase agreement and by a separate employment covenant in the employment agreement. The sale covenant usually runs from closing and protects purchased goodwill. The employment covenant usually runs from the end of employment and is reviewed under the state's employment noncompete rules, which are often stricter. A rollover owner can also be bound by covenants in the buyer's governing documents that last while the equity is held. Review each restriction, its agreement and its governing law separately. ## Related Resources Non-compete obligations run through the post-closing period alongside earnout milestones, escrow releases, and indemnification claims. For the full post-closing sequence covering each of those mechanics, see our pillar guide: [Post-Closing in M&A: Complete Guide](https://acquisitionstars.com/blog/post-closing-ma-complete-guide). Cluster 3: Selling ### How to Sell a Small Business: The Owner's Complete Guide From valuation to closing - the full sell-side journey. Cluster 3: Selling ### Earnout Agreements Explained: Structure, Risks & Negotiation How earnouts interact with non-competes and deal structure. Cluster 3: Selling ### Business Exit Planning: When and How to Prepare Your Exit Start preparing for the non-compete conversation 90 days out. Cluster 4: M&A Attorney ### What Does an M&A Attorney Do? (And When You Need One) Why seller-side legal counsel is essential for non-compete negotiation. Legal Services ### Business Acquisition Attorney Services M&A counsel from LOI through closing. Non-compete negotiation included in every deal. ## Legal counsel for this topic Acquisition Stars handles M&A transactions nationwide and works with securities counsel on securities matters. Alex Lubyansky leads the M&A engagements. [Closest fit for this topic M&A attorney M&A attorney for mergers, acquisitions, and divestitures.](https://acquisitionstars.com/ma-attorney) [M&A attorney services M&A counsel for mergers, acquisitions, and divestitures.](https://acquisitionstars.com/services/mergers-acquisitions) [Business acquisition lawyer Legal counsel for buyers from letter of intent through closing.](https://acquisitionstars.com/business-acquisition-lawyer) [Michigan service areas Acquisition Stars serves clients across Michigan and nationwide.](https://acquisitionstars.com/locations) [Request Engagement Assessment](https://acquisitionstars.com/consultation) --- Source: https://acquisitionstars.com/blog/non-compete-agreements-business-sales Markdown version generated for machine readers. Canonical HTML at the source URL.