What should the seller's non-compete say?

What should the non-compete cover?

• Who is bound. The selling entity, each of its owners, and anyone the seller could compete through, such as a spouse active in the business. Each should sign.
• The restricted business. Define it as what the company actually does, with reasonable extensions. "Residential HVAC service and installation" holds up better than "any business."
• Territory. Where the company actually does business or draws customers. For an online business, define it by customers and products rather than miles.
• Duration. A stated period, running from the later of closing or the end of the seller's consulting or employment.
• Non-solicitation of customers. The seller may not approach your customers to move their business, even outside the territory.
• Non-solicitation and no-hire of employees. Often the most valuable clause. The seller knows which employees matter.
• Confidentiality and non-disparagement. Customer lists, pricing and methods stay confidential. The seller agrees not to run down the business.
• Carve-outs. Passive investments in public companies, and any other business the seller disclosed and you agreed to.
• Remedies. Your right to seek an injunction, recover legal fees, and extend the period by the length of any breach.
• Assignment. Your right to assign the covenant to an affiliate or a future buyer of the business.

Why are sale-of-business non-competes treated differently?

When you buy a business, you pay for its goodwill: the customers, reputation and relationships. A seller who opens across the street takes that goodwill back. Courts generally see that as a reason to enforce the promise. Many states that restrict employee non-competes still allow them in a sale of a business, within limits. Your lawyer will tell you the limits where the business operates.

Overreach is the main risk. If the territory, duration or scope goes further than needed to protect what you bought, a court may narrow it. In some states it may refuse to enforce it at all. A narrow covenant you can enforce is worth more than a broad one you can't.

How do you decide how long and how far?

There is no single right number. Tie the terms to the business.

• Duration: how long it takes for customers to see you, not the seller, as the business. Relationship-heavy businesses need longer than transactional ones.
• Territory: where the customers are today, from the customer list, not a round number of miles.
• Scope: the services the seller could realistically take with them.

The seller's motive matters too. In IBBA's Q2 2026 Market Pulse survey, retirement was the top reason owners sold: 45% of sellers under $500K and up to 72% in $1M to $2M deals. A retiring seller usually accepts a non-compete easily. A younger seller staying in the trade will push back on scope. Probe that before the letter of intent.

How does the non-compete interact with taxes and an SBA loan?

• Tax. A non-compete signed as part of an acquisition is generally a Section 197 intangible. You amortize it over 15 years, the same as goodwill. The seller generally pays ordinary-income rates on it. A large allocation costs the seller and gives you no faster deduction. A modest allocation helps show the covenant was bargained for. Confirm with a CPA.
• SBA rules. As of October 2026, a seller may stay on as a consultant or employee for up to 24 months in total after closing. SBA rules prohibit seller earnouts, so don't tie any payment for the non-compete to future performance. If you plan to pay for it over time, tell your lender early.

Worked example: allocating price to the non-compete

Illustrative figures.

• Price: $1,200,000. You propose $30,000 for the non-compete.
• Your deduction: $30,000 ÷ 15 years = $2,000 a year. That is the same as if the $30,000 were goodwill.
• The seller's cost: $30,000 taxed at ordinary rates instead of capital-gain rates.
• If you pushed it to $200,000: your deduction is $200,000 ÷ 15 = $13,333 a year, again unchanged versus goodwill. The seller now has $200,000 of ordinary income and will ask for more price.
• Separately, the seller consults for $5,000 a month for 12 months = $60,000 for real services. You generally deduct it as paid. The seller reports it as ordinary income. It sits within the 24-month SBA limit.

Where these numbers come from: The 15-year amortization of acquisition non-competes comes from Section 197 of the Internal Revenue Code. The 24-month seller limit and the earnout prohibition are from SOP 50 10 8.1, summarized by Cantrell Firm and Beancount's SOP 50 10 8.1 guide. Seller motives are from the IBBA Market Pulse Q2 2026 highlights. Enforceability depends on state law. Confirm with a lawyer in that state. SOP 50 10 8.1 applies to loans numbered on or after October 1, 2026; lender practice under it is still settling and these are secondary summaries, so confirm current terms with your SBA lender.

Related questions

Should the seller's spouse sign the non-compete?

If the spouse owns part of the business or works in it, yes. Otherwise the seller could compete through them. Your lawyer will decide who else should sign.

What if the seller wants to keep a related side business?

Disclose it in the purchase agreement and carve it out by name. Limit what it may do so it can't grow into a competitor.

Do key employees need non-competes too?

Employee non-competes face stricter rules, and some states bar them. Non-solicitation, confidentiality and retention pay usually do more. See how to keep employees after you buy.

What if the seller breaks it?

Your lawyer will usually seek an injunction first, because lost customers are hard to price later. A right to offset damages against a seller note helps, subject to your lender's terms.

What comes next

With the documents drafted, the question becomes timing: how long does it take to buy a business? If you plan to build a holding company, make every non-compete assignable to affiliates and future buyers, because a buyer of the platform will check.

Related articles

• What is purchase price allocation (Form 8594), and why does it matter?
• What kind of entity should you buy a business through?
• How long should the seller stay after the sale?
• Why would anyone sell a profitable business?
• How do you build a holding company for acquisitions?

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This article is general information, not legal, tax or investment advice.