Non-Compete Agreements in a Business Sale

when selling a business expect a non-compete agreement

Non-Compete Agreements in a Business Sale

When selling your business, your buyer will more than likely include a non-compete agreement as a required document to sign.  If you are retiring and have no interest in continuing in your profession, this shouldn’t be an issue.

I met a business owner that was interested in selling yet wanted to stay in their profession.  They wanted to sell their business, take chips off the table, and then work for the current buyer for a bit before starting another business in the same industry.  I told them due to a non-compete agreement that would be required by the buyer, the plan probably wouldn’t be successful.

When purchasing a business, buyers are acquiring much more than equipment, property and branding.  They are buying the relationships the seller has established within the community plus customer lists that create revenue.  The buyer needs to be protected from the seller reestablishing a business that would be a direct competitor.

When signing a non-compete agreement, make sure to have your M&A attorney either create the document or review the agreement if prepared by the buyer.


What will a Non-Compete Include?

  • Make sure the agreement is simple yet specific (when describing services and products) and reasonable. If your income comes only from customers in the Twin Cities, having a non-compete that covers the entire state of Minnesota may be looked at as too restrictive in a court of law.
  • Establish a time-period. Many of the non-competes I see run from three to five years.  Anything beyond five years may be considered too restrictive.
  • Be clear on the geographic area. This usually is spelled out as a mileage radius but depends on the industry and the reach of the business.  When we sell a business servicing the Twin Cites metro area, we normally see a 60-90 mile radius.


How is the Non-Compete Allocated in the Sale?


  • Don’t wait until you get to closing to determine your non-compete allocation. Agree to allocation when drafting the purchase agreement.  You will want to confide in your CPA for proper guidance.
  • Most buyers and sellers will not want this to be a large part of the allocation for tax purposes. For the seller this will be looked at as ordinary income instead of a capital gain.
  • Some non-competes are part of the sale and some are set up as “hold backs” where the seller is paid over the term of the non-compete period to ensure the seller stays true to their agreement.


Most attorneys will tell you a non-compete as part of a business sale is easier to enforce than a standard employment non-compete.  A new business owner needs time to establish themselves and the non-compete is one way to help ensure the purchaser is successful.

There are many legal considerations you will encounter when selling or buying a business.  The non-compete is one document you want to carefully think through.  If you are the seller, you want to make sure you are reasonably restricted by time and geographic area so you can eventually continue your profession at the appropriate time into the future should you so desire.  If you are the buyer, you want to make sure your seller is on your side to help you succeed during the transition and does not become your competitor.


This article was written by Sam Thompson. Sam is the president and owner of Transitions In Business, a Twin Cities based M&A firm that specializes in selling business to business and healthcare, transportation, manufacturing, distribution and construction/trade services companies. Sam is a Merger and Acquisition Master Intermediary (M&AMI) and a Certified Business Intermediary (CBI) who has successfully guided countless business owners through the sale or merger of their company. Prior to becoming a business broker, Sam was a successful CEO and business owner for 29 years before selling his $16 million business.