Restrictive covenants protect the buyer's investment after closing. A non-compete prevents the seller from starting or joining a competing business. A non-solicitation agreement prevents the seller from poaching the company's employees or customers. Most M&A transactions include both, but the scope, enforceability, and strategic importance of each differ significantly.
A contractual provision restricting the seller (and often key employees) from engaging in a competing business within a defined geographic area for a specified time period after closing. In M&A, non-competes are typically part of the purchase agreement or a standalone ancillary agreement.
Every business acquisition where the seller has relationships, knowledge, or expertise that could be used to compete. The non-compete is not optional; it is integral to protecting the buyer's investment in goodwill and customer relationships.
A contractual provision restricting the seller from actively soliciting the business's employees, customers, or vendors for a specified period after closing. Unlike a non-compete, a non-solicit does not prevent the seller from working in the same industry. It only restricts targeted solicitation.
Jurisdictions where non-competes are unenforceable or limited, as a supplement to a non-compete (belt and suspenders approach), situations where the seller's industry expertise should not be restricted, and when the primary concern is customer or employee retention.
| Factor | Non-Compete Agreement | Non-Solicitation Agreement |
|---|---|---|
| Restriction Scope | Prohibits competing in the same industry | Prohibits soliciting specific customers or employees |
| Seller Can Work in Same Industry? | No (within defined scope) | Yes (just cannot solicit) |
| Enforceability | Varies by state; subject to reasonableness analysis | Generally more enforceable (narrower scope) |
| Typical Duration | 2-5 years (3 years most common in M&A) | 2-5 years (often matches non-compete term) |
| Geographic Limitation | Required (must be reasonable) | Usually not required (defined by customer/employee list) |
| Protection Level | Broader: prevents all competitive activity | Narrower: only prevents active solicitation |
| California Enforceability | Enforceable in M&A (Business & Professions Code 16601) | Generally enforceable |
| Tax Treatment | Allocated consideration: ordinary income to seller, 15-year amortization for buyer | Same treatment under IRC Section 197 |
| Common Use in M&A | Standard in virtually all acquisitions | Standard alongside non-compete (belt and suspenders) |
Prohibits competing in the same industry
Prohibits soliciting specific customers or employees
No (within defined scope)
Yes (just cannot solicit)
Varies by state; subject to reasonableness analysis
Generally more enforceable (narrower scope)
2-5 years (3 years most common in M&A)
2-5 years (often matches non-compete term)
Required (must be reasonable)
Usually not required (defined by customer/employee list)
Broader: prevents all competitive activity
Narrower: only prevents active solicitation
Enforceable in M&A (Business & Professions Code 16601)
Generally enforceable
Allocated consideration: ordinary income to seller, 15-year amortization for buyer
Same treatment under IRC Section 197
Standard in virtually all acquisitions
Standard alongside non-compete (belt and suspenders)
When consideration is specifically allocated to a non-compete agreement in an asset purchase, the buyer can amortize that amount over 15 years under IRC Section 197. The seller reports the allocated amount as ordinary income (not capital gains). Both sides have competing tax incentives in the allocation.
Consideration allocated to a non-solicitation agreement follows similar treatment to non-compete consideration under IRC Section 197 (amortizable over 15 years for the buyer, ordinary income for the seller). The allocation between non-compete and non-solicit should be reasonable and supportable.
The primary risk is unenforceability. If the non-compete is too broad in scope, duration, or geography, a court may refuse to enforce it or may 'blue pencil' it down to a narrower scope. Some states (California, most notably) refuse to enforce non-competes in most contexts, though M&A non-competes tied to the sale of a business are an exception under California Business and Professions Code Section 16601.
Lower litigation risk than non-competes because non-solicits are generally narrower and more enforceable. The main challenge is proving that the seller engaged in active solicitation rather than passive acceptance of business. Purchase agreements should define 'solicitation' clearly.
Use both. In most M&A transactions, the buyer should insist on both a non-compete and a non-solicitation agreement. The non-compete provides broad protection against the seller competing. The non-solicit provides targeted, more easily enforceable protection against poaching. If state law limits or prohibits non-competes, the non-solicit becomes the primary protective mechanism.
Critical legal issues to evaluate when deciding between non-compete agreement and non-solicitation agreement:
Non-compete enforceability varies dramatically by state. California generally prohibits non-competes but has a specific exception for non-competes tied to the sale of a business (BPC 16601). Other states apply reasonableness tests evaluating duration, geography, and scope. Some states (like Colorado and Illinois) have enacted new restrictions. Know your state's law.
The FTC proposed a rule in 2023 to ban most non-compete agreements nationwide. As of 2026, the rule's status remains in flux due to legal challenges. M&A non-competes tied to business sales may be exempt, but the regulatory landscape is evolving.
Buyers want to allocate more to the non-compete (amortizable deduction). Sellers want to allocate less (ordinary income vs. capital gains on goodwill). The allocation should be reasonable and defensible. The IRS can challenge allocations that lack economic substance.
The purchase agreement should clearly define what constitutes solicitation. Does responding to an inbound inquiry count? Does general advertising that reaches former customers count? Does hiring an employee who applied without being contacted count? These boundary cases are where disputes arise.
Non-competes and non-solicits should cover not just the selling owner but key employees who could take customers or trade secrets. These employees may need to sign separate restrictive covenant agreements, potentially with additional consideration.
Common questions about non-compete agreement vs non-solicitation agreement
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