You’ve heard that non-competes are hard to enforce. You may have heard it from a lawyer.
That’s mostly about employment non-competes — the ones companies ask employees to sign. The non-compete you sign as part of selling your business is analyzed differently, and courts have long treated it more favorably.
Assume the one in your purchase agreement will be enforced, and negotiate it accordingly.
Why the sale version is treated differently
The reasoning is straightforward. When an employee signs a non-compete, they’re often trading away their ability to earn a living for a job they needed. When a seller signs one, they’re getting paid — sometimes for decades of built-up goodwill — and the buyer is protecting the very thing they just bought.
If you could sell your business on Friday and open a competing one across the street on Monday, taking your customers with you, the buyer paid for nothing. Courts in Pennsylvania and New Jersey understand that, which is why a covenant tied to the sale of a business generally gets more room than one tied to a job.
Both states still ask whether the restriction is reasonable — in duration, in geography, and in the activities it covers — and whether it’s genuinely tied to protecting the buyer’s legitimate interest. But “reasonable” is a much wider lane here than in the employment context.
A note on the news: non-compete rules have been an active area of federal and state attention in recent years, and that attention has focused almost entirely on employment non-competes. Sale-of-business covenants have generally been treated as a separate category. If you’re relying on a specific current rule, check it — but don’t assume a headline about employee non-competes tells you anything about the one in your purchase agreement.
What the buyer will ask for
Expect a package, not a single clause:
Non-compete — you won’t operate or work in a competing business.
Non-solicitation of customers — you won’t approach the customers you just sold, even if they come looking for you.
Non-solicitation of employees — you won’t hire away the team.
Confidentiality — you won’t use or disclose the business’s information. This one is usually permanent and usually reasonable.
Non-disparagement — sometimes included.
The non-solicits often matter more in practice than the non-compete. Plenty of sellers have no intention of starting a competing company but very much intend to stay in touch with people they’ve known for twenty years. Read those clauses with that in mind.
The four dials that decide what you’re actually giving up
1. How long. Typically tied to the deal, and often longer than what would fly in an employment agreement. Five years isn’t unusual in a business sale. If you’re also staying on as an employee or consultant, watch whether the clock starts at closing or when your employment ends — the second version can be much longer than you thought you agreed to.
2. Where. A radius, a county list, a state, or “anywhere the business operated.” Push for it to match where the business actually did business, not where the buyer someday hopes to. If your customers were all within thirty miles, a five-state restriction is protecting an expansion plan you weren’t paid for.
3. What activity. This is the dial sellers pay the least attention to and should pay the most. “Any business competitive with the Business” is broad enough to catch things you’d never think of as competing. Get it defined narrowly and specifically — the actual services and products the business sold, not the whole industry.
4. Who’s bound. Just you, or you plus your spouse, your kids, and any entity you control? Broad definitions of who’s covered are common and often negotiable.
The carve-outs worth asking for
Passive investment. You should be able to own a small stake in a public company that happens to compete without breaching your agreement. Ask for a percentage threshold.
Existing activities. If you already have another business, another role, or a side interest that could arguably be caught, name it and exclude it. In writing. Now.
Inbound contact. If a former customer calls you unprompted, is that solicitation? Better to define it than to argue about it later.
Genuine retirement. If you’re actually done, a long non-compete may cost you nothing — but say so out loud, because if you’re not sure you’re done, the terms should reflect that.
What happens if the buyer doesn’t pay. This one matters and gets missed. If you’re carrying a seller note and the buyer defaults, are you still bound by a five-year non-compete? Ask for the restriction to fall away — or shorten — if the buyer stops paying you. It’s a reasonable request and it’s much harder to get after the fact.
If you want to stay in the industry, say it early
This is the conversation to have before the letter of intent, not during purchase agreement negotiation.
Sellers who plan to consult, teach, sit on boards, broker deals, or start something adjacent should raise it at the front. It’s usually workable when the buyer hears it early as part of the deal shape. It’s a much harder conversation at day 50, when the buyer has spent money and now suspects you of planning to compete with them.
The tax angle — talk to your CPA
Purchase agreements often allocate a portion of the price to the non-compete. How the price gets allocated across asset categories has tax consequences for both sides, and buyers and sellers frequently want different allocations. That’s an accounting conversation, not a legal one, and it should happen before the numbers are locked in. Bring your CPA in early.
The pattern we see most
A seller signs a five-year non-compete covering “any business competitive with the Business” across three states, plus a non-solicit that includes former customers and employees. They’re planning to retire, so none of it feels like a real constraint.
Eighteen months later they’re bored. A former customer asks them to consult on something adjacent. A former employee, now unhappy with the buyer, asks about coming to work for them.
Both are fine ideas. Both are arguably breaches. And now the seller is asking permission from a buyer with no reason to grant it — and possibly still holding escrow money.
The fix cost nothing at the time: a defined scope, a narrower geography, an inbound-contact carve-out, and a clear line on what counts as competing.
What to do next
If you’re selling and there’s a non-compete in the draft, read it as though you’ll change your mind about retiring. Many people do. The terms are negotiable while the deal is still being negotiated, and not afterward.
Holmes Business Law represents sellers and buyers of businesses in Pennsylvania and New Jersey — purchase agreements, restrictive covenants, seller notes, and the rest of the deal. We work with your CPA on allocation and tax questions.