Non-Competes When Selling a Business

Conor Meyers — Co-Founder & Business AttorneyHas built and run businesses; advises owners on contracts, transactions, and risk. About Conor →

You cannot sell a business’s goodwill and then compete for it. That is what the clause is really about.

Non-competes attached to employment are viewed with suspicion in most states and are increasingly restricted. Non-competes attached to the sale of a business are treated differently, and the reason is straightforward: the buyer paid for customer relationships and reputation, and a seller who reopens across the street takes back what was sold. Enforceability of sale-of-business restrictions turns on whether the scope matches what was actually purchased.

We handle these matters for growth-stage companies in Idaho and California. This is general information — not legal or tax advice on a specific situation.

Scope should trace the goodwill, not the seller’s whole career.

Why sale non-competes are treated differently

Employment non-competes raise concerns about bargaining power and a worker’s ability to earn a living. A sale-of-business covenant involves two commercially advised parties, and the seller receives payment specifically including the goodwill the covenant protects.

Courts across jurisdictions apply a more permissive standard as a result. That does not mean unlimited — the covenant still has to be reasonable in duration, geography, and scope of restricted activity.

More permissive is not unlimited. Reasonableness still governs.

Duration, geography, and activity

Seller non-compete duration in a business sale commonly runs three to five years, longer than would typically be sustained in employment. The period should reflect how long it takes the buyer to establish its own relationship with the acquired customer base.

Geographic scope of a sale non-compete should track where the business actually operated and drew customers, not an aspirational territory. Activity scope should describe the business sold rather than an entire industry — a seller of a commercial landscaping business should not be barred from all construction work.

Territory should follow customers, not ambition.

Non-solicitation and confidentiality

Non-solicit provisions in an acquisition often do more practical work than the non-compete. Restricting solicitation of customers and employees protects the relationships that carry value, and courts scrutinize them less because they restrict targeted conduct rather than an occupation.

Confidentiality obligations run alongside and generally without time limit for genuine trade secrets. The FTC’s business guidance is a useful reference point on how restrictive practices are viewed at the federal level.

Non-solicits often protect more and provoke less.

Valuing the covenant

Allocating value to a non-compete has tax consequences for both sides. Amounts allocated to a covenant are generally amortized by the buyer over a fixed statutory period and treated as ordinary income to the seller, which differs from goodwill treatment.

The allocation should be defensible and consistent with the purchase price allocation reported to the IRS. It is also worth remembering that a covenant with no allocated consideration can be attacked as unsupported.

A covenant with no allocated value is easier to attack.

What this means in practice

Sellers who intend to keep working should raise it early rather than at signing. Carve-outs for a named future role, for passive investment below a stated percentage, or for a specific line of work outside the business sold are all ordinary requests when made during negotiation. Raised at the last minute they look like an attempt to reserve the very goodwill the buyer is paying for.

Most of these problems are cheaper to prevent than to argue about.

The underlying rules on this are published directly by Idaho Legislature, and both are worth reading before you rely on a summary of them — including this one.

A simple plan to get a legal partner in your corner

Owners who bring in attorney to review a purchase agreement early almost always pay less than those who call one afterward.

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A three-step path from first call to ongoing protection.

Frequently asked questions