Do I Have to Sign a Non-Compete
When I Sell My Business? (2026)

The short answer: almost always, yes

If you sell an established company to a private equity firm or a strategic buyer, the purchase agreement will almost certainly include a covenant that you will not compete with the business you sold. Refusing is rarely realistic. Most of what a buyer pays for a lower middle market company is goodwill: customer relationships, reputation, and the people who know how the work gets done. In many owner-led companies that goodwill sits partly with you. A buyer that pays for it without a non-compete has, in Mintz’s phrase, no wish “to have funded a competitive enterprise.”

Courts accept that logic. A covenant signed as part of a sale is judged more leniently than one in an ordinary employment contract, because the buyer paid for what it protects. Venable describes sale-of-business covenants as “more liberally enforced, on the premise that the buyer” should be able to stop the seller from taking back the goodwill. So the useful question is not whether you will sign one. It is how long it runs, what it covers, how many documents repeat it, and how much of your price is labeled as paying for it.

What the FTC rule changed, and what it did not

In April 2024 the Federal Trade Commission adopted a rule that would have banned most new non-competes with workers. Even that rule exempted a non-compete “entered into by a person 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,” as 16 CFR 910.3(a) read. The final rule also dropped a proposed requirement that the seller own at least 25% of the company.

The rule never took effect. In Ryan LLC v. FTC, a federal court in Texas set it aside on August 20, 2024. On September 5, 2025, the Commission voted 3-1 to dismiss its appeals, and a February 2026 notice removed the rule from the Code of Federal Regulations. The FTC now brings case-by-case actions, and so far they have targeted employee non-competes: Gateway Services in pet cremation, and Rollins in pest control, whose order covers more than 18,000 employees. We found no FTC action aimed at a covenant signed in a genuine sale of a business.

State law decides, and sales are the exception

With no federal rule, enforceability turns on state law and the law the agreement chooses. The states best known for hostility to non-competes still carve out business sales, though several attach conditions that matter to the drafting.

Two details trip up owners. In a stock sale, California’s exception covers an owner who disposes of all of his or her interest; if you keep part of the company’s own equity, ask counsel whether you still qualify. And for agreements made on or after August 6, 2025, Colorado’s SB25-083 caps the covenant’s length for minority owners who received their stake as equity compensation or for services, using a formula tied to sale proceeds and pay. If you or your key managers live in a state that changed its law recently, have counsel check which version applies.

How long and how broad seller non-competes usually run

No public study tracks seller non-compete terms for US private deals the way SRS Acquiom tracks escrows and earnouts, so the ranges below are what M&A law firms describe as typical, not statistics, and the firms do not all agree.

Watch how the clock is defined. Many agreements run the covenant for the later of a period after closing or a period after your employment ends. One contract filed with the SEC ends the restriction on “the later of three (3) years from the date hereof or one (1) year from the date Seller’s employment with Buyer terminates.” If you stay four years, that is a five-year covenant.

Scope should match the business as it stands at closing. Morgan Lewis puts it plainly: “Ideally, the protected interests would tie to the business being sold at the time of the transaction.” A regional HVAC company does not need you barred from every HVAC market in the country, and certainly not from every business line of a buyer’s other portfolio companies. Buyers sometimes draft that broadly anyway. Mintz also notes buyers may push for longer terms from a seller who “received an outsized portion of deal proceeds.”

Why overbroad covenants now fail in Delaware

Many private equity deals choose Delaware law, and its Court of Chancery has spent four years striking down sale-of-business covenants that reach past the goodwill actually sold. Rather than trimming them to a reasonable size, it has often refused to enforce them at all.

• Kodiak Building Partners v. Adams (2022): a 30-month covenant covering all of the buyer’s business lines, not just the company sold, was unenforceable because it was “broader than the plaintiff’s legitimate business interest in the purchased assets.”
• Intertek Testing v. Eastman (2023): a five-year worldwide covenant on a co-founder paid about $10 million failed because the business served clients nationwide, not worldwide; revising it to save “a sophisticated party” from its overreach “would be inequitable.”
• BluSky Restoration v. Robbins (magistrate’s report, 2026): a five-year worldwide covenant from the sale of a regional Tennessee business was found unenforceable, as were the covenants in the sellers’ employment and later incentive-unit agreements. Quoting Kodiak, sale covenants “legitimately protect only the purchased asset’s goodwill and competitive space that its employees developed or maintained.”

Do not read this as permission to sign anything on the theory that a court will throw it out. The Delaware Supreme Court in March 2026 revived an employer’s claim in Payscale v. Norman against a former employee over a nationwide, 18-month covenant in a holding-company incentive-unit agreement, faulting the lower court for drawing inferences against the employer too early and expressing no view on whether the covenant will ultimately be enforced. It is not a sale case, but it shows that breadth alone does not end a lawsuit. And under LKQ v. Rutledge and the earlier Cantor Fitzgerald decision, a clause that makes you forfeit equity or deferred pay if you compete is generally not reviewed for reasonableness, only for ordinary contract defenses. Litigation is expensive, and the covenant you negotiate down is the one that protects you.

One sale, three covenants

The purchase agreement is rarely the only place a restriction appears. Mintz lists non-disclosure agreements, purchase agreements, LLC agreements, incentive equity grants, and employment agreements as homes for restrictive covenants, often with different terms.

• Purchase agreement. Tied to the sale, judged under the lenient sale-of-business standard, and usually measured from closing.
• Employment or consulting agreement. If you stay on, this covenant may run from the day you leave, and it is judged as an employee covenant, including under the state employee laws above. See our guide to reducing owner dependence for why buyers want you to stay.
• Rollover equity agreement. If you keep a stake, the holding company’s LLC agreement may restrict you, in Mintz’s words, “for as long as the equity holder continues to hold equity in the platform company, plus, potentially, a tail period.” Our rollover equity guide explains why that can be many years.

Ask counsel to lay the three side by side. The longest one, with the broadest definition of a competing business, is your real restriction. Morgan Lewis also warns that “company group” definitions can pull in the buyer’s other portfolio companies.

How the non-compete connects to your price and taxes

In an asset sale, buyer and seller allocate the price among asset classes on IRS Form 8594, and a written allocation binds both parties under §1060 unless the IRS finds it inappropriate. The amount assigned to your non-compete matters because, as the First Circuit put it in Muskat, covenant payments “are usually taxable as ordinary income, whereas payments received for the sale of goodwill are usually taxable as capital gains.” Payments for your own covenant are ordinary income in a stock sale too, as the sellers in Sonnleitner learned when the Tax Court rejected their capital gain treatment.

In an asset sale, the buyer usually does not care. Under §197, a covenant signed in connection with buying a business is amortized over 15 years, the same as goodwill, and cannot be written off early when it expires. The Tax Adviser sums it up: “The buyer is indifferent … However, the seller prefers goodwill because it is a capital asset.” A stock sale without a §338 election is different: the buyer cannot amortize the stock it buys, so it gains a deduction by assigning part of the price to your covenant, and it will want that allocation larger.

A hypothetical: on a $10 million asset sale, a buyer’s draft allocates $1 million to your non-compete. If you are in the top brackets for 2026, that $1 million is taxed at up to 37% instead of the 20% top long-term capital gain rate, roughly $170,000 more in federal income tax, while the buyer’s deductions are unchanged. The 3.8% net investment income tax, state taxes, and your entity type change the exact figure, so treat it as a direction, not a quote.

The figure has to be supportable in both directions. When buyer and seller have no opposing tax interests, the IRS scrutinizes the allocation, and The Tax Adviser notes it may argue that too little went to the covenant. Inflated covenants get cut too: in Langdon, a $1 million covenant in a roughly $2 million beer distributor sale was reduced to $334,000 because most of it “acted as a disguised payment” for the company’s intangible assets. Once you sign an allocation, you need “strong proof” to escape it (Sonnleitner). For C corporation owners, selling personal goodwill directly can avoid a second layer of tax, but a prior non-compete with your own company can defeat it, as the Journal of Accountancy describes in Howard. Our guides to asset versus stock sales and minimizing taxes on a sale go further.

What sellers can negotiate

The buyer-default term deserves attention if part of your price is deferred. If the buyer stops paying a seller note or an earnout, you should not remain barred from earning a living in your industry. One filed contract ends its covenant 30 days after the seller is fired without cause or resigns for good reason if the buyer “fails to satisfy its obligations to pay the severance.” Expect the buyer to resist and to insist on tolling, which pauses the clock while you are in breach.

Settle it in the letter of intent

Letters of intent often say little about the non-compete, and the details arrive later in the buyer’s first draft of the purchase agreement, after you have signed exclusivity. The ABA’s model stock purchase agreement materials list non-compete covenants among the terms a seller wants settled while it has the “greatest negotiating leverage,” and Goodwin advises buyers to “explain how you will approach non-compete” in a competitive LOI. One sentence covering length, geography, the definition of a competing business, and whether the covenant extends past your employment is enough. Our letter of intent guide covers the rest of the list, and our guide to comparing multiple LOIs explains why the time to ask is while more than one buyer is at the table.

Non-competes by sector

The fight over scope looks different by industry. In MSP and IT services and business services, client relationships are the asset, so customer non-solicits matter as much as the non-compete. In preschool and childcare and pet care, geography is local, which favors a radius around existing sites. In the trades and industrials, an owner who holds a license or key supplier relationship will face a covenant tied to that role. Platform buyers rolling up any of these sectors often draft for the platform’s entire footprint, which is where the Delaware cases above began.

How Salt Creek helps owners negotiate a non-compete

We raise the non-compete, the employment terms, and any rollover covenant with every qualified buyer before you sign a letter of intent, so the restriction is compared alongside price and cash at closing rather than discovered in the first draft of the purchase agreement. We work with your counsel and tax advisor on scope and allocation. Jack and Connor Pitts are directly involved in every engagement, and our standard M&A engagements have no upfront retainer.

Frequently asked questions

Do I have to sign a non-compete when I sell my business? Almost always, if the buyer is paying for goodwill. You can refuse, but most private equity and strategic buyers will lower the price, restructure the deal, or walk away. The negotiation is usually over length, scope, and carve-outs, not whether one exists.

Is a non-compete enforceable after the FTC ban was struck down? The FTC rule never took effect and was removed from federal regulations in February 2026. Even that rule exempted business sales. Enforceability depends on state law and the agreement’s governing law, and courts apply a more lenient standard to covenants signed in a sale.

How long is a typical non-compete when selling a business? M&A law firms describe three to five years after closing as common, and Morgan Lewis cites two to five years. Check whether the period runs from closing or from the end of your employment, since a “later of” clause can make it much longer.

Can a buyer stop me from working in my industry anywhere in the country? A buyer can ask, but a covenant should match the business sold and where it operated. Delaware courts have refused to enforce worldwide or buyer-wide covenants that reach past the purchased goodwill, as in Kodiak, Intertek, and BluSky.

Does California allow non-competes when you sell a business? Yes. Business and Professions Code §16601 allows a covenant from a seller of goodwill or of all of an owner’s interest, limited to the area where the business operated. A partial stock sale in which you keep part of the company may not fit.

How is money paid for a non-compete taxed? As ordinary income to you, while goodwill is usually long-term capital gain. In an asset sale the buyer amortizes both over 15 years under §197, so it usually gains nothing from a larger covenant allocation; in a stock sale without a §338 election it does. Agree a supportable figure with your tax advisor.

What if the buyer stops paying my seller note or earnout? Unless your agreement says otherwise, the non-compete may still bind you. Ask for a clause ending the covenant if the buyer defaults on deferred payments, and expect the buyer to negotiate its conditions.

Can I keep investing or start a different business after the sale? Usually, if the agreement says so. Ask for a carve-out for small passive investments, a schedule of businesses you already own, and a definition of a competing business limited to what the company did at closing.

Sources

• Federal Trade Commission, “Federal Trade Commission Files to Accede to Vacatur of Non-Compete Clause Rule,” September 5, 2025.
• Federal Register, “Revision of the Negative Option Rule, Withdrawal of the CARS Rule, Removal of the Non-Compete Rule To Conform These Rules to Federal Court Decisions,” 91 FR 6507, February 12, 2026.
• Mintz, “Restrictive Covenants in Private Equity Transactions,” May 14, 2025.
• Morgan Lewis, “Restrictive Covenant Considerations for Executives in Corporate Transactions,” September 2025.
• Delaware Court of Chancery, BluSky Restoration Contractors v. Robbins, Magistrate’s Final Report, March 4, 2026.
• Delaware Supreme Court, Payscale v. Norman, March 19, 2026.
• 26 U.S.C. §197 and §1060; IRS, Instructions for Form 8594.
• The Tax Adviser, “Handling tax issues related to noncompete agreements,” May 1, 2021.