Long-Term Care is our core platform. Actively pursuing Pharmacy, Distribution & Consumer/Beauty acquisitions (EBITDA $600K+).
Long-Term Care is our core platform. Actively pursuing Pharmacy, Distribution & Consumer/Beauty acquisitions (EBITDA $600K+).
Selling a business does not always mean the seller can immediately start a similar company or pursue the same customers. A buyer may require a non-compete agreement when selling a business as part of the transaction to help protect what they are purchasing.
A business-sale non-compete is a contractual restriction in which the seller promises not to compete with the business sold for a given amount of time, within a specific geographic area, or through specified activities, according to relevant law and the conditions of the transaction. The restriction is usually established as part of the purchase agreement or other transactional agreements.
For a buyer, the concern is straightforward: after paying for a company’s goodwill, customer relationships, brand, know-how, and market position, the buyer generally does not want the seller immediately creating a competing operation and taking those relationships with them.
However, a seller non-compete is not automatically enforceable simply because it appears in a business purchase agreement. State law, the transaction’s circumstances, the wording of the restriction, and applicable federal competition law can all matter.
A non-compete agreement in a business sale limits certain competitive activities by the seller after the transaction closes. For example, suppose an owner sells a regional healthcare services company. The buyer may negotiate a provision preventing the seller from opening or operating a directly competing healthcare services business within a defined market for a specified period.
The purpose is generally connected to the value being transferred in the transaction. The buyer may be acquiring:
Without appropriate protections, the buyer could face a situation where the former owner sells the company and then uses knowledge, relationships, or reputation associated with the acquired business to compete directly against it. The exact scope of a seller non-compete agreement depends on the transaction and applicable law.
Read also: Asset Sale vs. Stock Sale
A buyer is not simply purchasing equipment, inventory, contracts, or a website. In many acquisitions, a significant portion of the transaction’s value comes from relationships and intangible assets. A non-compete may therefore be negotiated to reduce competitive risk after closing.
Goodwill can represent customer loyalty, reputation, established relationships, and other advantages associated with an operating business. A buyer may want the seller to refrain from immediately competing for that same goodwill.
If the seller has longstanding relationships with customers, the buyer may be concerned that those customers could follow the seller into a new business.
A seller may understand pricing, operations, suppliers, customers, and market practices that would otherwise give a competing business an advantage.
A buyer may also negotiate transition arrangements with the seller. The non-compete can be one part of a broader framework governing what happens after closing.
Importantly, a non-compete does not operate in isolation. It may appear alongside confidentiality, non-solicitation, transition, and other contractual provisions.
The restrictions vary considerably from one transaction to another. Four areas deserve particular attention.
A non-compete may restrict certain competitive activities for a defined period after the transaction.
There is no single duration that applies to every U.S. business sale. The appropriate period can depend on applicable state law, the nature of the business, the transaction, and the interests the restriction is intended to protect.
A seller should therefore avoid assuming that a particular period is automatically valid simply because similar agreements use it.
The agreement may identify a geographic area where competitive activities are restricted.
The scope may be related to the market actually served by the acquired business. For example, a company serving customers within a particular regional market may have a different geographic footprint from a business operating nationally.
Whether a geographic restriction is enforceable depends on the applicable law and facts.
The agreement may identify the specific activities or types of businesses the seller cannot pursue.
This distinction matters. A restriction covering a narrowly defined competing business is different from language that could potentially restrict a seller from participating in a broad range of industries.
Sellers should understand exactly what the agreement considers a competing activity.
Some agreements also address whether the seller may hold an ownership interest in another business that competes with the acquired company.
The treatment of passive investments depends on the wording of the agreement and applicable law. Sellers who expect to invest in businesses after the transaction should review these provisions carefully.
A non-compete is only one type of restrictive covenant that can appear in a business transaction.
|
Provision |
General Purpose |
|
Non-compete |
Restricts specified competitive activities |
|
Non-solicitation |
May restrict solicitation of customers, employees, or other specified relationships |
|
Confidentiality |
Protects specified confidential information |
|
Non-disclosure |
Restricts disclosure or use of protected information |
A business purchase agreement may contain several of these protections at the same time. For example, a seller could be restricted from operating a competing business while also being prohibited from soliciting certain customers or disclosing confidential business information.
The answer depends on the agreement, transaction, applicable jurisdiction, and surrounding facts.
State law remains an important part of the analysis. Courts may consider factors such as:
The FTC’s 2024 Noncompete Rule is not currently in effect or enforceable. The FTC says a federal district court stopped enforcement in August 2024, and in September 2025 the FTC took steps to dismiss its appeals and accede to vacatur of the rule.
The rule itself also contained an exception for non-competes entered into as part of a bona fide sale of a business entity, an ownership interest in a business entity, or all or substantially all of a business’s operating assets.
That does not mean every business-sale non-compete is automatically enforceable. State law and other applicable legal requirements can still affect the provision.
This is also why a sale-of-business non-compete should not automatically be treated the same way as an employee non-compete.
|
Sale-of-Business Non-Compete |
Employee Non-Compete |
|
Negotiated as part of a business transaction |
Typically connected to employment |
|
Seller receives consideration for the business |
Employee receives compensation for work |
|
Often intended to protect acquired goodwill |
Often intended to address employer concerns about competition or confidential information |
|
Governed by the transaction documents and applicable law |
Governed by employment agreements and applicable law |
|
May involve the sale of a business, ownership interest, or operating assets |
Concerns restrictions imposed on a worker |
These categories should not automatically be treated as legally identical. The FTC’s current materials distinguish business-sale transactions from employment non-competes, while state law remains relevant.
A seller should understand the restriction before signing the purchase agreement.
Ask:
This review is particularly important for owners who already have plans for their next business venture. For example, a seller may expect to retire from one industry but later invest in another company. A broadly written provision could create questions about whether those future plans fall within the restricted activities.
Qualified transaction counsel should review the provision before the seller signs.
Buyers generally need to balance protection with the actual business interests associated with the acquisition.
The provision should be connected to the business being acquired and clearly identify the activities the seller is restricted from pursuing.
Buyers should consider:
An unnecessarily broad restriction can create legal and negotiation issues. The goal is not simply to prohibit every future business activity of the seller, but to address the competitive risks associated with the transaction within the boundaries of applicable law.
Sellers can create problems by treating the non-compete as a routine paragraph in a much larger purchase agreement.
Common issues include:
The restriction can also affect transaction negotiations. Duration, scope, exceptions, transition obligations, and other terms may need to be considered alongside the broader deal structure.
A non-compete can become part of negotiations between buyer and seller.
The parties may need to discuss how the restriction relates to:
A non-compete does not automatically increase or decrease a business’s value. Instead, its terms can become one component of the overall negotiation between the parties.
For a seller, the key question is not simply whether there is a non-compete. It is what the provision actually prevents the seller from doing after closing.
Before agreeing to a non-compete when selling a business, consider these questions:
These questions can help identify restrictions that may affect the seller’s plans after the transaction.
A non-compete agreement when selling a business can be an important part of an acquisition because buyers may want protection for the goodwill, customers, relationships, know-how, and market position they are purchasing. For sellers, the most important issue is understanding exactly what the restriction covers, how long it lasts, where it applies, and how it could affect future business plans.
The current federal landscape should also be understood accurately: the FTC’s 2024 Noncompete Rule is not currently in effect or enforceable, and it contained a specific exception for certain bona fide sales of businesses. State law and other applicable competition rules can still affect a particular agreement.
If you are considering selling or acquiring a business, review proposed restrictive covenants as part of the broader transaction rather than treating them as routine contract language. Qualified legal and transaction advisors can help you evaluate the provision under the law applicable to the deal.
A buyer may seek to protect acquired goodwill, customer relationships, brand value, business know-how, market position, and other assets associated with the acquired business.
There is no universal duration that applies to every U.S. transaction. The appropriate period depends on the agreement, applicable state law, transaction circumstances, and other relevant factors.
Potentially, but the answer depends on the terms of the transaction documents and applicable law. A seller should determine whether the planned business falls within any restricted activities before proceeding.
The FTC’s 2024 Noncompete Rule is not currently in effect or enforceable. The FTC’s materials also state that the rule contained an exception for certain bona fide business-sale non-competes. State and other applicable law can still matter.
Yes. Because enforceability and scope can depend on the agreement, transaction structure, applicable state law, and other circumstances, sellers should have qualified transaction counsel review the provision before signing.
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