Non-Compete and Non-Solicit Agreements in M&A Deals

Goodwill is a central component of value in most business acquisitions. A buyer paying a purchase price above the tangible asset value of a business is, in material part, paying for the seller's customer relationships, market position, and reputation. A non-compete covenant in the acquisition agreement protects that investment by restricting the seller from immediately opening a competing business and drawing back the customers and relationships the buyer just paid for. Without an enforceable non-compete, the buyer's goodwill acquisition may be worth substantially less than the purchase price suggests.

Start by identifying the actual restriction and the capacity in which each person will sign. A seller who stays with the business may have obligations in both the purchase agreement and an employment agreement. Review each document and the applicable legal requirements before assuming that a restriction is valid or that one agreement resolves the other.

This guide is part of the Employment Law in M&A: A Legal Guide for Buyers, Sellers, and Key Employees. It covers the non-compete and non-solicit review framework for M&A transactions: the sale-of-business versus employment context distinction, the FTC rule's current status, state-law examples, California's section 16601 exception, non-solicitation structures, geographic and temporal reasonableness, blue-penciling and reformation, consideration requirements, executive versus rank-and-file treatment, the seller's covenant in the APA, buyer non-solicits of acquired employees, choice of law, trade secret overlap, and garden leave alternatives.

Parties evaluating the broader deal structure should review the M&A deal structures guide and the asset purchase vs stock purchase guide. The structure of the transaction affects how seller non-competes are characterized and how state law applies to the governing documents.

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Non-compete vs. non-solicitation: what should a buyer or seller compare?

A non-compete restricts competing activity; a non-solicitation provision restricts specified approaches to customers, employees or other covered relationships. In a business acquisition, compare the actual conduct restricted and the people bound before deciding whether either clause fits the transaction.

Compare the actual restrictions before signing
Provision	Read the draft for	Question before signing
Non-compete	Restricted business activities, territory and duration	What work or ownership activity would the seller be giving up?
Customer non-solicitation	Covered customers, restricted contact and any lookback period	Does the clause address active outreach, unsolicited business or both?
Employee non-solicitation	Covered employees and the distinction between recruiting and hiring	What happens if an employee applies without being approached?

The clause's label does not establish enforceability. Identify whether the person is signing as a selling owner, a continuing employee or both, and have counsel review the applicable law and the proposed wording. Review a restriction in an employment agreement independently of the purchase agreement.

A seller covenant can protect goodwill transferred with a business. Establish what goodwill, ownership or operating assets are being sold and which person is giving the restriction. Separate that transaction from any continuing employment relationship. The applicable sale exception and its conditions must fit the actual transfer before the parties rely on broader protection. Duration and territory belong in that analysis; a customary-looking number supplies no independent legal justification.

In the employment context, the analysis shifts. An employee typically has less negotiating power than an employer, and the employment non-compete may have been presented as a condition of employment with limited negotiation opportunity. The consideration may be only the initial job offer, continued employment, or a modest additional payment. The restriction may prevent the employee from working in their chosen field for a substantial period. Legislatures in an increasing number of states have responded to these power imbalances by banning or severely restricting employment non-competes.

When the seller becomes an employee. A seller who continues post-close as an employee can encounter both transaction and employment restrictions. In this scenario, the seller is simultaneously a party to a sale-of-business non-compete in the APA and potentially a party to an employment non-compete in a separate employment agreement. Some courts have scrutinized whether the APA non-compete in a seller-employee scenario is genuinely a sale-of-business covenant or is functionally an employment non-compete dressed in different language. Buyers should ensure that seller non-competes in seller-employee transactions are structured and documented as sale-of-business covenants supported by the purchase price, not as a mechanism for obtaining a broader employment restriction than the applicable state would otherwise permit.

Is the FTC non-compete rule in effect?

The FTC’s 2024 Noncompete Rule remains unenforceable following vacatur, according to the FTC's current rule-status page. On September 5, 2025, the agency announced steps to dismiss its appeals and accept the rule's vacatur.

The 2024 text contained a bona fide sale-of-business exception. That provision in an unenforceable rule does not establish that a particular seller covenant is valid. Check the applicable state law, the transaction and the actual restriction rather than treating the rule as a nationwide answer.

For the review, identify who will sign, the person's ownership and employment roles, the restricted activity and the next signing deadline. Check separate federal competition-law issues where relevant; the rule's status does not resolve every legal question about a restriction.

California Business and Professions Code 16600: The Sale-of-Business Exception

Start with California’s statutory prohibition on restraints of lawful work and identify the particular exception being claimed. A purchase agreement label alone leaves the qualifying transaction, seller and scope unresolved. California counsel should review the actual ownership transfer, goodwill and related employment documents together before the buyer treats a seller restriction as enforceable.

California Business and Professions Code section 16601 addresses specified goodwill, ownership-interest and operating-asset transfers. It ties the permitted restriction to a similar business within the specified area where the sold business operated, while the buyer or successor carries on a like business there. Identify the statutory route that matches the transfer rather than treating every equity grant, partial sale or employee exit as a qualifying business sale.

Requirements for Section 16601 Compliance

Give counsel the ownership records, proposed transfer agreement, goodwill provisions, consideration and continuing-role documents. Ask which section 16601 transaction category applies and what facts support it. The California Court of Appeal’s Samuelian decision (August 20, 2024) discusses the distinction between partial and complete ownership transfers. A small ownership interest or an employment relationship requires careful transaction-specific analysis rather than an assumed percentage shortcut.

Define the sold products and services, actual customer territory and activities the seller plans to retain. Ask counsel to compare each restriction with the applicable exception and supporting facts. Record permitted activities explicitly, including retained businesses and passive investments, so the seller and buyer understand what happens after closing. The final wording should reflect the lawful protection available for the transferred business.

Review California’s employment restrictions separately from the business-sale exception. Have counsel evaluate the worker’s location, the work performed, signing history and proposed governing-law and forum clauses. The application of California law requires more than selecting an out-of-state jurisdiction in the purchase agreement. A seller continuing as an employee should receive an explanation of how each document affects future work.

State Enforcement Spectrum: From Ban to Broad Enforcement

The enforceability of employment non-competes varies dramatically across state lines, and the gap between the most restrictive and most permissive states has widened in recent years as legislative reform has accelerated. Any buyer acquiring a multi-state business or employing workers in multiple states must understand the spectrum.

States with Near-Total or Complete Employment Non-Compete Bans

Minnesota Statutes section 181.988 illustrates why employment and sale covenants need separate treatment. It voids employment non-competes within its scope while providing a sale-of-business exception for a temporary restriction with reasonable geographic and time limits. It also distinguishes non-solicitation and confidentiality provisions in its definitions. Verify the agreement’s signing date, parties and statutory coverage before applying that framework.

States with Income Thresholds and Strict Limitations

For Illinois, Freedom to Work Act section 10 sets different earnings thresholds for employment non-competes and non-solicits and schedules increases. Section 20 separately requires written advice to consult counsel and the specified review opportunity. Check the signing date, actual or expected earnings and covenant type against both provisions. Salary alone leaves notice, consideration and other enforceability conditions unresolved.

States with Reasonableness Review and Statutory Frameworks

Texas Business and Commerce Code sections 15.50–15.51 provide statutory enforceability and reformation rules. The applicable agreement, protected interest and limits on time, area and activity matter. Specific categories of workers can have additional rules. Use enacted law and relevant decisions to evaluate the actual covenant rather than categorizing a state as automatically favorable to enforcement.

Build a covenant review record for each person

Record the seller’s ownership transfer and any continuing employment role.
Identify the states connected to the work, business and proposed enforcement.
Check current law for this covenant type, signing date and covered person.
Resolve the permitted activity, consideration, delivery and remedy questions in the final documents.

Non-Solicitation of Employees and Customers: Scope and Enforcement

Non-solicitation covenants are distinct from non-compete covenants in their scope and, historically, in their enforceability. A non-compete broadly restricts competition. A non-solicit restricts specific conduct: recruiting employees away from the business, or soliciting customers to transfer their business. In M&A, both types of non-solicitation covenants serve distinct purposes.

A customer non-solicitation restricts the seller from soliciting the acquired company's existing customers for a defined period after closing. This covenant is narrower than a full non-compete because it allows the seller to compete generally but restricts the seller from targeting the specific customer relationships the buyer acquired. Courts generally view customer non-solicits as more reasonable than broad non-competes because they protect a defined set of identified relationships rather than all potential business opportunities. However, when the seller's expertise or market is so concentrated that the customer non-solicit effectively prevents any meaningful competition, courts in restrictive states have sometimes analyzed customer non-solicits with the same skepticism applied to non-competes.

An employee non-solicitation restricts the seller from recruiting or hiring the acquired company's employees after closing. Buyers use employee non-solicits to protect the workforce they are acquiring, which may include key employees with specialized knowledge, customer relationships, or proprietary skills. Employee non-solicits have come under increasing scrutiny in several states: California treats them with the same skepticism as non-competes, and some state legislatures have explicitly extended non-compete reform statutes to include employee non-solicitation restrictions that have the practical effect of limiting employee mobility.

Drafting the customer non-solicit in the APA. A customer non-solicit should identify the scope of restricted customers with sufficient precision to be enforceable and administrable. Identify whether the proposed clause covers current customers, a defined lookback period or prospective customers, and have counsel evaluate that scope under the applicable law. Distinguish active solicitation, responses to unsolicited inquiries and general competitive activity in the draft. The parties should understand which conduct is proposed, then have counsel evaluate whether that scope is permitted and appropriate for the transaction.

Employee non-solicit scope. Identify the covered employees and proposed restrictions on recruitment, hiring, unsolicited applicants and general advertising. Have counsel evaluate the actual conduct and scope under applicable law, including how the draft affects ordinary professional or social contact. Negotiate a period supported by the relationships being transferred and have counsel assess the applicable legal limits. Record how unsolicited applicants and general recruiting are treated.

Buyer non-solicitation of acquired employees. The reverse non-solicit, where the buyer agrees not to solicit employees of the seller who are not hired post-close, is less common but appears in some transactions where the seller retains part of the business or the parties have an ongoing relationship post-close. Buyer non-solicits of acquired employees are an unusual covenant structure and their purpose and scope should be clearly defined in the purchase agreement to avoid ambiguity about which employees are covered and for how long.

Garden Leave and Alternative Covenant Structures

Garden leave arrangements have emerged as an alternative to traditional non-compete covenants, particularly in employment contexts where non-competes face increasing enforceability challenges. In a garden leave arrangement, the employer retains the employee's active employment status during the restriction period, continuing to pay salary and benefits but requiring the employee to stay away from work. The employee remains on the payroll, continues to accrue benefits, and does not compete during the garden leave period because they remain technically employed.

For covered employment agreements, Massachusetts General Laws chapter 149, section 24L permits a qualifying garden-leave clause or other specified, mutually agreed consideration. Its garden-leave formula uses the employee's highest annualized base salary during the preceding two years. Check the statute's exclusions and other conditions, including its separate treatment of qualifying business sales, before applying the employment framework.

In the M&A context, garden leave arrangements are less common for seller non-competes in the APA because the purchase price itself constitutes consideration. Garden leave is more relevant for employment non-competes applicable to key employees retained post-close who are not themselves sellers of the business. When a buyer retains key employees who are not selling equity and wants enforceable post-employment restrictions on those employees, garden leave pay during the restriction period is a mechanism that supports enforceability in scrutinous jurisdictions and demonstrates genuine consideration.

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Geographic and Temporal Reasonableness in Sale-of-Business Non-Competes

Ask counsel to connect the proposed territory and duration to the sold business and the applicable statutory or judicial framework. Document where customers are located, what products and services generate the goodwill being bought and what competitive activity is being restricted. The negotiated purchase price can explain the commercial context, while enforceability still requires its own legal analysis.

Provide customer-location and operating-footprint records for the actual business being transferred. Distinguish the buyer’s existing nationwide operations from the seller’s business. If the draft covers the buyer’s future products, new territories or affiliates, ask why those activities appear in this seller covenant and whether the proposed reach is supportable. Keep any agreed exclusions in the signed documents.

Choose duration by examining the business being sold, the goodwill at issue, customer relationships and the applicable legal limits. A period accepted in another transaction leaves this covenant's validity unanswered. Document the commercial justification and review each seller and continuing employee in the capacity in which they sign.

Blue-Pencil, Reformation, and the Risk of Total Invalidity

When a court finds that a non-compete is overbroad, the remedy depends on which approach the governing jurisdiction applies. The options range from complete enforcement as written (in jurisdictions with minimal scrutiny), to partial enforcement through blue-penciling, to complete reformation with judicially revised terms, to total invalidation.

Blue-penciling allows courts to strike overbroad language while enforcing the remaining valid restrictions. A classic blue-pencil scenario involves a non-compete with an overbroad geographic restriction: the court strikes the language extending the restriction to states where the seller had no customers and enforces the restriction as written for the narrower geographic area. Blue-penciling requires that the valid restriction be separable from the invalid language, so that striking the offending provision leaves an enforceable remaining covenant rather than a commercially meaningless fragment.

Reformation involves modifying a restriction rather than merely deleting severable words. For example, Texas section 15.51(c) addresses reformation and limits relief for conduct before reformation. Have counsel explain the remedy available under the governing law, including any limits on damages. Depending on a future court to repair an overbroad draft adds uncertainty and enforcement expense.

An overbroad restriction can expose the parties to invalidity, litigation costs and limited remedies. Ask counsel whether the governing law permits deletion, reformation or neither for this covenant and what relief remains available. A severability clause expresses the parties’ intention, but the court’s authority and applicable law control its effect. Draft each restraint around the actual protected interest before signing.

Executive vs Rank-and-File: Tiered Covenant Structures

Not all employees in an acquired business warrant the same level of post-close restriction. A tiered approach to non-compete and non-solicit covenants recognizes that executives, key sales personnel, and employees with access to trade secrets pose different competitive risks than general workforce employees. Applying the same broad restriction across all employees both creates legal risk (courts are less tolerant of broad restrictions on lower-wage workers) and commercial risk (it may deter qualified candidates from joining the business post-close).

Assess each continuing employee’s role, access to sensitive information, workplace and applicable statutory coverage. A senior title, retention payment or participation in the sale process supplies facts for analysis rather than an automatic right to broader restrictions. Document the proposed consideration and have employment counsel check the separate agreement, delivery requirements and permitted scope.

For other retained employees, start with the information and relationships that actually need protection. Consider confidentiality, ownership of work product and permissible relationship restrictions with employment counsel. Evaluate the terms offered to each covered group and the effect on recruiting and retention. A standard form for every worker can miss exclusions, signing requirements and restrictions that differ by jurisdiction.

The retention bonuses and enhanced compensation that support a broader covenant for key employees raise their own set of legal issues, including how those payments are triggered, taxed, and allocated. Our guide to change in control severance, retention agreements, and transaction bonuses in M&A covers single versus double trigger structures and 280G allocation for these arrangements.

Drafting the Seller's Non-Compete in the Asset Purchase Agreement

The seller's non-compete in an asset purchase agreement (APA) is one of the most consequential provisions the parties will negotiate. It determines what the seller can do after closing and for how long. A well-drafted covenant gives the buyer the protection it needs without creating enforcement risk. A poorly drafted covenant may be unenforceable when the buyer tries to enforce it, leaving the buyer without recourse against a seller who immediately re-enters the same market.

The APA non-compete should be drafted as a standalone, clearly defined covenant with its own defined terms. The business being sold should be precisely defined to establish the competitive scope. Competing activity should be defined with reference to the specific products or services the sold business provided, not as all possible activities that might compete with any business the buyer conducts. The geographic restriction should be tied to the territory where the sold business operated and had customers, defined as specifically as the business's geographic footprint permits.

Identify each proposed covenantor and why that person or entity belongs in the agreement. An individual owner, selling entity and affiliate present different capacity and consideration questions. Obtain counsel’s analysis before attempting to bind a family member or another nonparty. The drafting should make responsibility clear without assuming that a seller can impose obligations on everyone connected to the business.

APA Non-Compete Covenant Checklist

✓Define the "Competitive Business" by reference to the specific products, services, and customer types of the sold business
✓Define the "Restricted Territory" tied to the geographic footprint of the sold business's actual customer relationships and operations
✓Identify proposed covenantors and have counsel verify each party’s capacity, consideration and legal basis for the restriction
✓Specify the Restricted Period and its start date (typically the Closing Date) with a clearly defined end date
✓Include a customer non-solicit covering customers of the sold business at or within a specified period before Closing
✓Include an employee non-solicit covering key employees of the acquired business for a defined period
✓Carve out passive investment in publicly traded companies below a specified ownership percentage
✓Have counsel assess available injunctions, proof requirements and bond requirements; align the remedy language with applicable law
✓Select governing law and forum with awareness of how the chosen jurisdiction treats sale-of-business covenants

The non-compete covenant fits within the broader framework of the asset purchase agreement. For context on how non-compete provisions interact with representations, indemnification, and other closing conditions in the APA, review the indemnification provisions guide and the broader asset purchase vs stock purchase framework.

Choice of Law and Forum Selection for Non-Compete Enforcement

Choice of law and forum selection clauses are strategic tools in non-compete drafting, but they have significant limitations that buyers must understand before relying on them to create a more favorable enforcement environment. The basic premise of a choice-of-law clause is that the parties can select the law of a particular state to govern their agreement, allowing them to choose a non-compete-friendly jurisdiction even when the seller or employee lives and works in a state that would restrict the covenant.

Employment statutes can limit governing-law and venue choices. Minnesota section 181.988, subdivision 3 protects covered employees against specified out-of-state adjudication and loss of Minnesota substantive protections. Ask counsel to evaluate the employee’s residence and work, the agreement’s scope and the forum provision together. Check the particular jurisdiction’s conditions before relying on a choice-of-law clause.

For a seller covenant, document the connection between the selected law, parties and sold business. Ask counsel what happens if enforcement is sought where the seller lives or plans to work. A choice-of-law clause remains subject to the law governing its application. Address forum, enforcement process and the actual sale exception together, including any separate employment agreement.

Trade Secret Overlap and the Defend Trade Secrets Act

Non-compete covenants and trade secret protection are related but distinct mechanisms for protecting a buyer's investment in acquired goodwill and proprietary information. They overlap significantly: the seller who violates a non-compete often does so by using the acquired company's trade secrets in a competing venture. Understanding how these two frameworks interact allows buyers to build a more comprehensive protection structure and to identify which mechanism provides the most effective remedy in a given breach scenario.

The Defend Trade Secrets Act, 18 U.S.C. section 1836 provides a federal civil remedy for qualifying misappropriation involving interstate or foreign commerce. Its statutory conditions and available relief require separate analysis. Identify the information at issue, ownership, reasonable secrecy measures and alleged use or disclosure before assuming that a customer list or business plan qualifies for protection.

During diligence, identify confidential information being transferred and how the seller protected it. Allocate access rights, delivery methods, return or deletion obligations and responsibility for post-closing controls. If misuse is suspected, preserve relevant records and obtain advice about the facts and available claims. A contractual restriction and a trade-secret claim can involve different elements, defenses and remedies.

For the complete legal framework governing M&A transactions, including how non-compete and trade secret provisions fit within the deal documentation and indemnification structure, review the M&A deal structures guide and the M&A transaction services overview. For the sibling article covering WARN Act compliance obligations in the same transaction framework, see the WARN Act notice guide.

Structuring Non-Compete and Non-Solicit Provisions for an Acquisition?

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Frequently Asked Questions

What is the difference between a sale-of-business non-compete and an employment non-compete?

A sale-of-business covenant concerns the goodwill or ownership being transferred. An employment covenant concerns work following an employment relationship. A seller continuing as an employee can encounter both. Identify the applicable exception and legal requirements for each agreement separately.

What is the current status of the FTC's Non-Compete Rule?

The FTC’s 2024 Noncompete Rule remains unenforceable following vacatur. The agency announced steps to dismiss its appeals and accept vacatur on September 5, 2025. Check the FTC’s linked status page and the law applicable to the actual restriction.

Does California allow non-competes in business sale transactions?

Section 16601 provides an exception for specified goodwill, ownership and operating-asset transfers, subject to its conditions. Give California counsel the actual transfer and continuing-role documents to assess the qualifying transaction and permitted restriction. A purchase agreement label alone leaves those questions unresolved.

Which states have banned or severely restricted employment non-competes?

State laws differ in covered workers, exclusions, compensation tests and signing requirements. The examples linked above include Minnesota’s employment prohibition and sale exception, Illinois’s separate earnings and notice provisions, and Massachusetts’s employment framework. Check the law for the actual worker and covenant rather than relying on a state category.

What is a non-solicitation agreement and how does it differ from a non-compete?

A non-compete restricts specified competitive work or business activity. A non-solicitation clause addresses specified approaches to customers, employees or other relationships. Read the definition of restricted conduct, covered people and exceptions, then have counsel evaluate the applicable law.

How is geographic and temporal reasonableness analyzed in non-compete enforcement?

Compare the proposed territory, activity and duration with the actual business transferred and the governing law. Document the customer footprint, products and services, start date and any extension provisions. A nationwide customer base or negotiated duration alone leaves other enforceability requirements to be resolved.

What is blue-penciling and how does it affect non-compete enforcement?

Blue-penciling concerns deleting severable language; reformation concerns modifying the restriction. The governing law determines what the court can do and what relief is available. Ask counsel to evaluate the actual draft before relying on a future court to narrow it.

What consideration is required for a valid non-compete in M&A?

Identify what each covenantor receives, the qualifying sale and any separate employment arrangement. Have counsel evaluate consideration under the applicable law and coordinate any tax allocation with the tax adviser. Purchase price and employment compensation require analysis in the context of the actual documents.

Employment Law in M&A: Related Guides

Non-compete and non-solicit covenants are one component of the broader employment law framework in M&A transactions. Review the related guides for a complete picture.

Employment Law in M&A: A Legal Guide for Buyers, Sellers, and Key Employees WARN Act Notice in M&A Transactions: Federal and State Compliance Asset Purchase vs Stock Purchase Indemnification Provisions in M&A M&A Deal Structures M&A Transaction Legal Services

Non-Compete and Non-Solicit Agreements in M&A: Sale-of-Business vs Employment Context

Key Takeaways