Non-Compete Agreement
A negotiated limit on the seller competing against the business they just sold.
01
What It Means
A non-compete agreement in a business sale restricts the seller from starting or joining a competing business within a defined geographic area for a defined period of time. Related provisions may also address soliciting employees or customers.
Enforceability depends on state law and on whether the restriction is reasonable in scope, geography, and duration. Courts generally treat restrictions tied to the sale of a business more favorably than employment non-competes.
The agreement often carries an assigned portion of the purchase price, which has its own tax treatment.
02
Why It Matters
Much of what a buyer pays for is the customer relationship. Without a non-compete, a seller could reopen nearby and take that value back.
Overly broad terms can be as risky as none at all, because a court may narrow or refuse to enforce them.
For the seller, the scope matters personally. A restriction written too widely can limit consulting work, industry employment, or a future venture years later.
03
Common Misconceptions
- "Non-competes are unenforceable everywhere now." Rules differ by state, and sale-of-business covenants are treated differently than employment agreements.
- "Longer and broader is always better for the buyer." Unreasonable scope invites a challenge.
- "A non-compete covers solicitation too." Non-solicitation is usually a separate provision that must be drafted.
- "The allocated dollar amount is arbitrary." It affects tax treatment for both parties.
04
Questions to Ask
- What geographic area and time period apply?
- Which activities are restricted, and which remain permitted?
- Are employee and customer non-solicitation provisions included?
- How is the covenant valued and allocated in the purchase price?
- Is this restriction enforceable under the applicable state's law?
05
Related Reading & Resources
The most successful real estate decisions often involve collaboration between several professionals working toward the same goal. Understanding each person's role helps you ask better questions and make more confident decisions.
06
Other Business Sale Terms
- Asset SaleThe buyer purchases specific business assets rather than the legal entity that owns them.
- Stock SaleThe buyer purchases the ownership interest in the entity, and the business continues intact.
- GoodwillThe intangible value of a business beyond its tangible assets — reputation, customers, and earning capacity.
- EBITDAEarnings before interest, taxes, depreciation, and amortization — a common starting point for valuing a business.
- Seller FinancingThe seller carries part of the purchase price as a note, and the buyer repays over time.
- Letter of Intent (LOI)A preliminary outline of the key deal terms before definitive documents are drafted.
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