The non-compete you sign as a seller is not the one you signed as an employee

A non-compete signed as part of selling your company is judged under the sale-of-business standard, not the employment standard. Courts enforce a reasonable one because the buyer paid for goodwill. That leniency has limits, so placement matters: put the covenant in the purchase agreement, tie it to what your business did, and price its tax cost first.

Why is a seller’s non-compete enforceable when an employee’s non-compete often is not?

In most states a seller’s covenant is reviewed under the sale-of-business standard, which asks whether the restraint protects goodwill the buyer actually purchased. An employee covenant is reviewed as a restraint on a worker’s livelihood. Several states that void employment non-competes keep a statutory exception for the seller of a business, including California, Minnesota, Oklahoma and North Dakota.

California is the clearest illustration. Section 16600 voids restraints on a lawful trade. Section 16601 permits a person selling the goodwill of a business, or an owner disposing of all of their ownership interest, to agree not to carry on a similar business in a specified geographic area where the sold business was carried on. Read “all” literally: roll equity instead of selling out and the exception may not reach you.

The other exceptions are drawn the same way. Minnesota voids covenants entered into on or after July 1, 2023, excepting one agreed upon during a sale of a business, limited to a reasonable area and time. Oklahoma and North Dakota also except sale-of-goodwill covenants, and North Dakota has used a reasonableness test since its 2019 amendment rather than naming one county. The FTC’s 2024 rule never took effect: it was set aside nationwide, the agency withdrew its appeals in September 2025, and it exempted sale-of-business covenants anyway.

Law: California Business and Professions Code 16600, 16601; Minn. Stat. 181.988, subds. 1(a), 2(b)(1); 15 Okla. Stat. 217, 218, 219A, 219B; N.D. Cent. Code 9-08-06(1) (as amended 2019); Ryan LLC v. FTC (N.D. Tex. Aug. 20, 2024).

Should the covenant sit in the purchase agreement, and when should its clock run?

The non-compete belongs in the purchase agreement and should run from closing, not from the end of any post-closing employment. The statutory exceptions are keyed to the sale of goodwill or of ownership, so a covenant appearing only in your employment agreement invites the argument that it is an ordinary employment restraint.

Watch the clock. An employment-agreement covenant usually runs from the end of employment, so stay on three years and it is still running long after the buyer’s goodwill risk has passed. Ask for one covenant, in the purchase agreement, plus a sentence making that article the exclusive restriction on your competitive activity. Any second covenant must be no broader and no longer.

Duration should track how long acquired goodwill takes to become the buyer’s, and that transfer is front-loaded: introductions in the first year, renewals in the second. A retiring owner should trade a shorter non-compete for a longer no-solicit, and align the longest tail with the buyer’s money, letting the seller note or earnout period set the outer limit.

Two covenants means two clocks. Only one of them starts at closing.

How do I define the restricted business so it does not grow with the buyer’s next acquisition?

Define the Restricted Business by what your company actually did as of the signing date of the purchase agreement. A definition reaching anything competitive with the buyer or its affiliates expands with every acquisition the buyer later makes. Delaware’s Court of Chancery has repeatedly refused to enforce that kind of covenant on a sale, and refused to narrow it.

In Kodiak Building Partners, the covenant protected the buyer’s other holdings as well as the acquired construction supply business. The court denied an injunction against a departing stockholder who had received sale proceeds, held the restraint exceeded the goodwill purchased, and declined to blue pencil it. Intertek Testing Services and, in March 2026, BluSky Restoration Contractors struck down five-year worldwide covenants for the same reason: the acquired business was regional.

In Sunder Energy, which involved covenants on an equity-holding employee rather than a seller, the Delaware Supreme Court confirmed that refusing to reform an overbroad covenant is discretionary. Many states narrow covenants instead of striking them, so never sign an overbroad clause assuming a court will erase it. Nor does choosing Delaware law settle anything: in HighTower Holding the court applied another state’s law and denied an injunction.

So attach a signing-date description of the business, by service line and NAICS-style activity, to the disclosure schedules, and delete “and its affiliates” from the protected-party language.

Case law: Kodiak Building Partners v. Adams (Del. Ch. Oct. 6, 2022); Intertek Testing Services v. Eastman (Del. Ch. Mar. 16, 2023); HighTower Holding v. Gibson (Del. Ch. Feb. 9, 2023); Sunder Energy v. Jackson (Del. Ch. Nov. 22, 2023), aff’d (Del. Dec. 10, 2024); BluSky Restoration Contractors v. Robbins (Del. Ch. Mar. 4, 2026).

What territory should I accept, and which carve-outs come with it?

Territory should track the closing footprint: the states, counties or metro areas where your company sold, delivered or served customers in the twelve months before closing. Worldwide language has been struck down repeatedly where the sold business ran regionally. Then take the carve-outs, because none of them costs the buyer goodwill it paid for.

Some states set the outer limit by statute. Oklahoma’s sale-of-goodwill exception speaks of a specified county and contiguous counties, or a city or town. Minnesota and North Dakota apply a reasonableness test, and North Dakota courts refuse to let a foreign choice-of-law clause displace it. If you sell online, restrict named customers instead of territory.

Put the carve-outs on a schedule attached to the purchase agreement, not loosely inside the covenant.

• Passive ownership up to a stated percentage, with no board seat, no officer role, no services.
• Every line of business, asset and entity not being sold, including real estate you keep and lease back.
• Investments, board seats and family businesses you already hold, disclosed by name.
• Employment by a diversified company, so long as you avoid the competing unit.

Should the no-hire become a no-solicit, and how narrow can the customer limb be?

A no-hire bars you from employing anyone who works for the company, even someone who answers a public job posting. A no-solicit bars only active recruiting. Convert the no-hire into a no-solicit. Then limit the customer limb to customers of the sold business whose relationships you personally held.

Legislatures treat solicitation as the lesser restraint. Minnesota’s definition of a covenant not to compete expressly excludes non-solicitation agreements and agreements protecting trade secrets. Oklahoma voids ordinary non-competes yet permits restrictions on soliciting established customers and, separately, employees. That asymmetry is your argument for a longer no-solicit and a shorter non-compete.

On the employee limb, exclude anyone the buyer terminated and anyone hired through general advertising. On the customer limb, exclude prospects who never bought and customers with no revenue in the trailing year.

Law: Minn. Stat. 181.988, subd. 1(a); 15 Okla. Stat. 217, 219A, 219B.

How does my covenant differ from what a key employee or a minority holder should sign?

An owner-seller receiving sale consideration, a key employee receiving none, and a passive minority holder with no customer contact are three different parties, and Kodiak is a warning against papering them identically. Each has a different legitimate interest to protect, a different home document, and a different answer on payment.

Say so early if minority holders are asked to sign your covenant. The buyer’s own enforcement risk rises when it overreaches.

What happens if I stay on after closing and the buyer fires me?

The fired-and-forbidden problem is this: you stay on after closing, the buyer terminates you, and the covenant in the purchase agreement still bars you from your own trade for years. The paychecks stop. The restriction does not. The answer is written release triggers, negotiated before signing.

Buyers resist, and not frivolously: they paid for goodwill at closing, and it does not evaporate when employment ends. Termination alone releases nothing, so put the middle ground in the contract.

• Termination without cause or resignation for good reason releases the non-compete limb; confidentiality and the no-solicit survive.
• Good reason is defined: a material pay cut, a material reduction in duties, or relocation beyond a stated mileage.
• Failure to pay the seller note, earnout or any deferred purchase price, uncured after written notice, releases the covenant.
• A buyer bankruptcy or assignment for the benefit of creditors releases the covenant.
• Paid non-compete time, where the covenant survives only while the buyer keeps paying your salary, is worth asking for but uncommon in owner-operated deals.
• Any tolling clause, which extends the term while you are in breach, is capped in months.

How is money allocated to the non-compete taxed?

Consideration allocated to a seller’s covenant not to compete is ordinary income to you, not capital gain. For the buyer, the covenant is a section 197 intangible amortized ratably over fifteen years when entered into in connection with an acquisition of an interest in a trade or business. This is stated as of August 2026; confirm with your CPA.

Now the part sellers miss. Goodwill is also a section 197 intangible amortized over fifteen years, so in an asset sale the buyer’s write-off period is identical whether a dollar sits in goodwill or in your covenant, while the allocation moves your bill materially. Ask your CPA about self-employment tax as well.

That parity has one exception. In a stock purchase with no section 338 or 336(e) election, the buyer gets no basis step-up and cannot amortize goodwill, yet a separately stated covenant payment remains amortizable. There the allocation is worth real money to the buyer. Know your structure first.

Mechanics matter. In an asset sale, allocation follows the residual method under section 1060 and both parties report on Form 8594; a purchase of all the membership interests in an LLC is generally treated as an asset acquisition. Fix the allocation in the agreement and require consistent filing.

In an asset sale, the buyer amortizes goodwill and your covenant on one fifteen-year schedule. Ask why the allocation matters to the buyer.

Tax, stated as of August 2026: 26 U.S.C. 61; 26 U.S.C. 197(a), 197(d)(1)(A), 197(d)(1)(E); Treas. Reg. 1.197-2; 26 U.S.C. 1060; Treas. Reg. 1.1060-1; Rev. Rul. 99-6; IRS Form 8594; Recovery Group, Inc. v. Commissioner, 652 F.3d 122 (1st Cir. 2011).

Is a breach of my non-compete covered by the indemnity cap?

Often it is not. Purchase agreements frequently exclude covenant breaches from both the deductible and the indemnity cap, so the exposure that survives closing longest is the exposure with no ceiling. Read the indemnification article and the definition of Losses before you agree to the covenant’s scope.

Three questions answer it. Does the cap apply to covenant breaches, or only to representation breaches? Is the escrow or holdback the exclusive recovery source, and are covenant claims carved out of it? Do fees shift to the prevailing party, or only to the buyer? Representation and warranty insurance changes those answers but is uncommon in owner-operated deals this size, so assume an escrow.

Do not treat the remedies clause as self-executing. A recital of injunctive relief without bond is a stipulation, not a ruling; injunctions stay discretionary. A broad covenant, uncapped, with one-way fee shifting, is the largest uninsured risk many sellers carry past closing.

What should I do before I sign the purchase agreement?

Work the covenant before the letter of intent hardens, because scope negotiated after diligence looks like retrading. Take these four steps in order and you will capture most of the leverage available to you as a seller on this one article of the agreement.

• Print the restrictive covenants article and mark every appearance of “affiliates”, “at any time”, “worldwide” and “any business”.
• Write your own description of what the business did in the last twelve months, plus the states or counties where its customers were, and offer these as the definitions.
• Ask your CPA to model the allocation with the covenant funded and unfunded, and whether the buyer’s amortization changes in your structure.
• Confirm the release triggers, and if the buyer uses SBA-guaranteed financing, ask the lender what the current SBA standard operating procedures allow for your post-closing role.

Then check placement once more. If the covenant sits in the purchase agreement, tied to the business you actually ran, running from closing, with release triggers, you signed the seller’s covenant. If it runs from termination, you signed the employee’s.