Non Compete Agreement for Sale of Business, State Rules, Length and Tax for Buyers

Short answer: A non compete agreement for the sale of a business is enforceable in every US state we checked, including California, as long as it is reasonable in length, area and line of business. Three to five years is the common range. The buyer amortizes whatever is paid for it over 15 years, and the seller pays ordinary income tax on it, so how much of the price you assign to the covenant is a negotiation in its own right.

We run a marketplace for buying AI SaaS businesses, so we see this clause from the buyer's side first. Everything below was read from the statutes, the IRS and the marketplaces' own terms on 30 September 2026. It is not legal or tax advice; a lawyer licensed in the seller's state should read the final covenant.

Why the sale-of-business non-compete is treated differently

When you buy a business you pay for goodwill: the customers, the reputation and the owner's relationships. If the seller can open a copy next month and call the same customers, part of what you paid for walks out of the door. That is why courts and legislatures that are hostile to employee non-competes still allow them in a sale. The employee is protecting a paycheck; the seller has just been paid for the goodwill.

The federal picture is settled for now. The FTC's own rule page says "The Noncompete Rule is not in effect and it is not enforceable." A Texas court set the rule aside in August 2024, the FTC voted 3 to 1 on 5 September 2025 to drop its appeals, and the rule was removed from the Code of Federal Regulations on 12 February 2026. Even when it was on the books, it excluded non-competes signed "pursuant to a bona fide sale of a business entity." The FTC has since gone after employee non-competes case by case (Gateway Services in 2025, Rollins in 2026). None of those actions touched a business sale.

Is a non-compete enforceable in the sale of a business?

Yes, in every state we read, provided it is reasonable. State law is where the detail lives, and a few states have rules that change how you draft it. This is what each statute says about a covenant signed by the seller of a business.

A few of those rows need more than six words. Florida's statute presumes a seller restraint of three years or less reasonable and one of more than seven years unreasonable. Georgia presumes reasonable the longer of five years or the period over which the seller is still being paid, which matters if part of the price is a seller note or an earnout. Washington passed a law in 2026 that voids almost every non-compete from 30 June 2027, but it keeps the sale exclusion for anyone selling an interest of one percent or more. Oregon's statute is written for employment agreements and says nothing express about sales; that sale covenants fall outside it is our reading, not a court's.

Are non-competes legal in California when you sell a business?

Yes, under Business and Professions Code 16601, with one condition that catches minority sellers. The owner has to sell the goodwill or all of their ownership interest in the business, or the business has to sell substantially all of its operating assets with the goodwill. The covenant must be limited to a "specified geographic area" where the business actually operated. A founder who keeps a slice of equity may fall outside 16601, and since 2024 section 16600.5 makes a void non-compete unenforceable wherever it was signed and lets the restricted person sue.

How long should a non-compete be when selling a business?

Three to five years covers most small business sales. Morgan and Westfield, the M&A advisory firm, puts the usual term at "three to five years" with the area matched to the business's market, and Acquire.com's own guidance says two to five. Go past five and you invite a challenge: Florida's presumption flips against you after seven, and a judge asked to enforce a long covenant will ask what the buyer actually paid to protect.

Scope matters as much as length, and for a software business it is where most covenants are badly drafted. A SaaS product has no county, so drafters reach for "anywhere in the world." Delaware's Court of Chancery struck exactly that in Intertek v. Eastman in March 2023, because the buyer had not shown it did business globally, and it refused to narrow the clause. Kodiak Building Partners v. Adams in 2022 went the same way on a covenant that reached the buyer's affiliates. Define scope by product category and by customers instead: no competing product in the same category, and no soliciting the customers on the billing export you bought.

What the marketplaces put in your purchase agreement

Empire Flippers writes its standard asset purchase agreement into its Terms of Use (modified 4 February 2026). Unless the parties agree otherwise, the seller may not compete with the business "for a period of three (3) years of the Sale Date, anywhere in the world." That default is convenient and it is also the worldwide wording Delaware rejected, so a buyer relying on it should narrow it on the offer form rather than assume it will hold. Flippa's APA Builder help article (updated 11 September 2026) says "Buyers may request that the Seller agree not to compete," so nothing is included unless you ask. Acquire.com's builder adds a completed non-compete if you tick it. On all three, the covenant you get is the one you write in.

Is a non-compete taxable to the seller?

Yes, as ordinary income rather than capital gain. The AICPA's Tax Adviser puts it plainly: "Payments received for a covenant not to compete are treated as ordinary income rather than capital gain." On the buyer's side, 26 U.S.C. 197(d)(1)(E) makes a covenant signed in connection with buying a business a section 197 intangible, amortized over 15 years no matter how short the covenant is. The First Circuit held a one-year covenant to the 15-year schedule in Recovery Group (2011), and IRS Publication 544 says the cost cannot be written off early unless the buyer disposes of its whole interest.

That sets up a quiet tug of war over the price allocation. Goodwill is also 15-year property for the buyer, so the buyer gains little by loading the covenant, while the seller pays ordinary rates on every dollar put there. The IRS can reallocate if the number looks unrealistic in either direction. Both sides report the split on Form 8594, where the covenant sits in Class VI; our page on purchase price allocation and Form 8594 walks through the classes, and the asset purchase agreement page covers where the covenant sits in the contract.

How much does a non-compete agreement cost?

ContractsCounsel's project data, updated 22 September 2026, puts the average lawyer fee at $550 to draft a non-compete and $360 to review one, across 125 recent projects. Those are mostly employment covenants; in a sale the covenant is usually a section of the purchase agreement, drafted as part of the deal counsel's fee. Our breakdown of what an M&A attorney costs for a small acquisition shows where that fee lands on deals under $5 million.

What a buyer should ask for

• A term of three to five years, or the length of any seller note or earnout if Georgia law applies and that is longer.
• Scope by product category and named customer list, not "anywhere in the world."
• A customer non-solicit and an employee non-hire alongside the non-compete; Minnesota's ban does not reach customer non-solicits at all.
• Everyone who holds the goodwill signs: co-founders and any shareholder whose stake is being bought, not only the entity.
• A price allocation both sides will defend on Form 8594.

Once it is signed, keep the covenant with the rest of your closing documents in the contract management software you use for other agreements and set a reminder for the expiry date, because a covenant nobody remembers is a covenant nobody enforces.

What the non-compete cannot protect

A non-compete stops the seller from competing. It does nothing about goodwill that was never there. If recurring revenue was padded, churn was hidden, or two customers were half the business, the covenant protects an asset that is smaller than the one you paid for. That risk is priced before the covenant is signed, in diligence; our guide to key person risk in a SaaS acquisition covers the founder-dependence problem the covenant is usually meant to solve.

Buyouts lists AI SaaS businesses with MRR, ARR, growth and churn verified against the billing data before the listing goes live, so the goodwill you are protecting with the covenant has been checked first. Buyer membership starts at $99 a month, Buyer Pro is $299 and Acquirer, with off-market deals, is $899. Buyers pay no success fee. See the buyer plans or browse SaaS companies for sale with verified metrics.