The seller's non-compete: what you are actually buying
A non-compete stops the seller from rebuilding the same business next door with the relationships you just paid for. Without one, much of what you bought — the customers, the reputation, the goodwill — can walk out of the closing with the person who sold it.
Why it is not boilerplate
On a Main Street deal a large part of the price is goodwill: customers who come back and staff who stay. None of that is bolted down. A seller who takes your money, waits six months and opens the same shop two streets away has sold you equipment and a lease.
What makes one hold up
Courts look at whether the restriction is reasonable, and reasonableness is judged on three axes at once:
| Time | Long enough to transfer the relationships, not longer. Multi-year terms are common in sale-of-business covenants; open-ended ones invite a court to strike or rewrite them |
|---|---|
| Geography | The area the business actually serves — the trading radius, not the state, unless the business genuinely operates that widely |
| Scope of activity | The business you bought, not every job the seller could ever do |
Sale-of-business covenants are treated differently from employment ones. Restrictions on employees have been through several years of regulatory and litigation upheaval and vary sharply by state; covenants given by a seller as part of selling a business have historically been viewed far more favourably, because the buyer paid for the goodwill being protected. Which rules apply to your deal, in your state, is a question for your attorney — and it is a cheap one to ask.
The clauses buyers forget
- Non-solicitation of customers and staff. Separate from non-competition, and often the more useful of the two: it stops the seller phoning the twenty accounts that matter.
- Who signs. The selling entity, the individual owner, and — where relevant — a spouse or a partner active in the business. A covenant signed only by a company that will be dissolved protects nobody.
- Consideration. Allocating part of the purchase price to the covenant strengthens it and has tax consequences for both sides; it belongs in the same conversation as the Form 8594 allocation in an asset sale.
- What happens if it is breached. Injunctive relief, and who pays the legal fees. Without that, enforcement costs more than the harm.
- Key employees. The seller's covenant does not bind the manager who runs the place. If the business depends on one or two people, they need their own agreements — and an incentive to stay.
A pre-screen flags whether a business is exposed here — a departing owner who is the main relationship, key staff without agreements, goodwill unprotected in the draft. What the covenant should say is your attorney's call.
Questions buyers ask
Is a seller non-compete enforceable?
Generally more readily than an employee non-compete, because the buyer has paid for the goodwill it protects — but enforceability turns on state law and on whether the duration, geography and scope are reasonable for the business actually sold. Rules on employee non-competes have shifted repeatedly in recent years and are a separate question; ask your attorney about both.
What should a seller's non-compete cover?
The same line of business, in the area the business genuinely serves, for long enough to transfer the relationships — plus non-solicitation of customers and employees, signatures from every person who could realistically compete, an allocation of consideration, and a remedy that includes injunctive relief and legal costs.
Related
- Letter of Intent (LOI) — A letter of intent sets out the deal you and the seller believe you have agreed: price, structure, what is included, and how long you get to verify it.
- Asset sale vs stock sale — In an asset sale you buy the things the business is made of and leave most of its history behind.
- Customer concentration — Customer concentration is the share of revenue that comes from your largest customers.
Checking a real deal? DealLoupe reads the documents a seller gave you and reports the red flags, the gaps and the questions to ask — before you spend anything on due diligence. See what a pre-screen costs →
Last updated: 2026-08-22