Non-Competes in a Business Sale Are Different

When you sell your business, the non-compete you sign is not the same animal as the one an employer might ask you to sign at a new job — and the law treats it very differently on purpose. A buyer isn't just paying for your equipment, your lease, and your inventory. A meaningful part of the price is for goodwill: the customer relationships, the reputation, the expectation that people who bought from you will keep buying from whoever now owns the business. If you could walk out of closing and open an identical shop across the street the next morning, that goodwill would be worth close to nothing, and the buyer would have overpaid. So courts and legislatures — even the ones most hostile to employee non-competes — carve out real room for a non-compete that's genuinely tied to a sale.

Why the law draws this line

Employee non-compete law is mostly worried about one thing: an employer using superior bargaining power to stop an ordinary worker from earning a living, often for a job that paid modestly and taught the worker skills they now can't use anywhere else. Sale-of-business non-compete law is worried about the opposite problem — protecting a buyer who paid real money for something (the business's ongoing customer relationships) whose value the seller could destroy by simply competing next door. The seller in this scenario also isn't a powerless party; they negotiated a purchase price, often with a lawyer or broker involved, and they're being compensated specifically for agreeing to step back.

That difference in bargaining power and purpose is why a state can simultaneously say "employee non-competes are void" and "a non-compete tied to the sale of a business is enforceable." Both rules can be true at once, and in most states that heavily restrict employee non-competes, they are.

California is the clearest example

California is famous for voiding almost all employee non-competes outright. But California law also contains a specific, separately written exception for sellers. Under it, someone who sells the goodwill of a business, disposes of all of their ownership interest in a business entity, or sells substantially all of a business's operating assets along with its goodwill may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business was carried on — and that agreement holds only so long as the buyer, or someone deriving title from the buyer, carries on a like business in that area. Courts read this exception narrowly, meaning every element of it — a real transfer of goodwill or ownership, a specified geographic area, the buyer actually continuing the business — has to be satisfied for the covenant to stand.

The lesson generalizes: if a state bans or limits employee non-competes, look for its own version of this sale-of-business carve-out rather than assuming the general ban protects you as a seller. State rules differ in the details — what counts as a qualifying sale, how much of an ownership interest must change hands, how "goodwill" is defined — and they change. Confirm the current wording in your own state's official statutes, or with a business attorney licensed there, before you sign.

Where the FTC's rule stands

You may have heard the FTC tried to ban non-competes nationwide. That rule is not in effect. A federal court set it aside, the Commission voted in September 2025 to dismiss its appeals, and the FTC then removed the rule from the Code of Federal Regulations effective February 12, 2026. There is currently no federal ban reaching sale-of-business non-competes — or employee ones, for that matter. Enforceability is governed by state law.

It's worth noting that even while the FTC rule existed, it did not apply to a non-compete entered into pursuant to a bona fide sale of a business entity, of the person's ownership interest in a business entity, or of all or substantially all of a business entity's operating assets. That the agency most determined to restrict non-competes still wrote the sale of a business out of its rule tells you how settled this distinction is. Because federal policy here has moved more than once, check ftc.gov for the current status before you rely on anything you read about it, including this article.

What makes a sale-of-business non-compete enforceable

Even where the law is generous to sellers, a non-compete tied to a sale still has to be reasonable to hold up if it's ever challenged. The things that generally matter:

• It has to actually be tied to the sale. A real transfer of the business, its assets, or its goodwill — not a token restructuring designed to dress up what's really still an employment restriction.
• Reasonable duration. There's no single number that applies everywhere, and what's reasonable shifts with the deal and the jurisdiction — but an open-ended or clearly excessive term is far more likely to be struck down or narrowed than one with a defined, deal-appropriate end date.
• Reasonable geography. The area has to track where the business actually operated or drew customers from — a local business can't reasonably justify a nationwide restriction just because the buyer would like one.
• Reasonable scope. The restriction should cover the kind of business you sold, not every business you might ever want to run. A non-compete written broadly enough to bar you from an unrelated trade or profession is more vulnerable to challenge.

How a court responds to an overbroad covenant also varies by state — some will narrow it to what's reasonable, others are far less willing to rewrite the parties' bargain. That's a question for a lawyer in your state, and it's a reason not to assume an aggressive clause will simply be trimmed later.

It's paid for — and taxed differently

Unlike an employee non-compete, which is usually just a condition of employment, a sale non-compete is typically separately bargained for and often has its own piece of the purchase price allocated to it in the deal documents. That matters for your taxes: money allocated specifically to a covenant not to compete is generally treated as ordinary income to you, not the more favorable capital-gains treatment that usually applies to gain on the business's assets and goodwill.

In an asset sale, the price gets allocated across asset classes, and both sides report that allocation to the IRS on Form 8594. A covenant not to compete lands in Class VI — section 197 intangibles other than goodwill — while goodwill and going-concern value sit in Class VII. Here's the part sellers miss: a buyer amortizes section 197 intangibles over fifteen years, and both a covenant and goodwill are section 197 intangibles. So moving dollars from goodwill into the covenant often costs the buyer very little, while it can convert capital gain into ordinary income for you. That asymmetry is exactly why your own CPA — not the buyer's — needs to review the purchase-price allocation before you agree to it. Get it reviewed early; it can meaningfully change what you keep from the deal. The Form 8594 instructions on irs.gov walk through the classes.

It usually travels with other covenants

A sale agreement rarely stops at a bare non-compete. Expect it to be paired with:

• A non-solicitation clause — barring you from actively going after the customers, clients, or employees you're leaving behind, even outside the geographic non-compete zone.
• A confidentiality clause — barring you from using or sharing the buyer's trade secrets, customer data, pricing, and other proprietary information.

Read each one on its own terms. A tightly written non-compete paired with a sprawling non-solicit can still leave you more boxed in than the non-compete alone suggests.

What to do as a seller

1. Negotiate scope, geography, and duration before you sign a letter of intent (LOI). An LOI usually says its deal terms are non-binding — but that's not the whole story, because provisions like exclusivity or "no-shop," confidentiality, and who pays expenses are typically drafted to bind you immediately. Once you've signed and stopped talking to other buyers, your leverage to narrow the covenant drops sharply, and buyers tend to treat the non-compete terms as settled from that point forward. Read the LOI to see which parts bind and which don't.
2. Make sure it doesn't reach further than your old business. A well-drafted covenant should let you earn a living in an unrelated field or industry. Push back on language broad enough to keep you out of work generally rather than just out of competing with the buyer.
3. Get the purchase-price allocation reviewed by your own CPA before you sign, specifically for how much is assigned to the non-compete versus the business assets and goodwill.
4. Have a business attorney confirm your state's current sale-of-business exception and how your state's courts have applied it — the general rule and the fine print can diverge.
5. Read the non-solicit and confidentiality clauses as carefully as the non-compete itself. Together they may restrict you more than any one clause does on its own.

If cost is the obstacle, the SBA and its resource partners — SCORE and your state's Small Business Development Center — offer free or low-cost counseling that can help you frame the questions before you pay for professional time.

This is general business information, not legal, tax, or financial advice, and reading it doesn't create an attorney-client or accountant-client relationship — talk to a qualified business attorney and your CPA about the specific terms of your sale.