How to Handle Non-Compete Clauses When Selling or Buying a Business

What You Need to Know About a Non-Compete Agreement When Buying a Business

A non-compete agreement buying a business is one of the most important — and most overlooked — documents in any M&A transaction. Here is a quick overview of what it does and why it matters:

• What it is: A legal contract that prevents the seller from opening a competing business or working for a competitor after the sale closes.
• Why buyers need it: Without one, a seller could close the deal on Friday and open a competing shop across the street on Monday — taking customers, staff, and goodwill with them.
• Is it enforceable? Yes. Unlike employee non-competes, business sale non-competes are legal and enforceable in all 50 states, including California.
• Typical duration: 3 to 5 years is the standard range.
• Typical geographic scope: Tied to the actual market area where the business operates — often a local radius for brick-and-mortar businesses, broader for regional or national ones.
• Does the FTC ban apply? No. The FTC's 2024 final rule banning non-competes explicitly carved out bona fide business sales.

Whether you are buying a small local business or a mid-market company, understanding these rules protects your investment from day one.

When you buy a business, you are not just buying equipment and inventory. You are buying goodwill — the customer relationships, reputation, and brand recognition built over years. A non-compete is what keeps that goodwill from walking right back out the door with the seller.

I'm Scott Batey, a Michigan employment and business law attorney with nearly 30 years of experience advising clients on restrictive covenants, including reviewing and negotiating non-compete agreements in the context of buying a business. If you are a buyer or seller in Michigan navigating one of these agreements, the sections below will walk you through everything you need to know before you sign.

Why You Need a Non Compete Agreement Buying a Business

When you purchase an existing business, a massive chunk of the purchase price is allocated to intangible assets, specifically customer goodwill. If you are buying a local HVAC company in Southfield or a specialty medical practice in Birmingham, you are paying for the phone number, the brand name, and the expectation that loyal customers will keep coming back.

But what stops the former owner from taking your cash at closing and immediately launching a rival company down the street?

Without a written, legally binding restrictive covenant, virtually nothing. A seller who knows the local market, possesses direct relationships with key clients, and holds the personal cell phone numbers of your newly acquired staff can decimate your investment in a matter of weeks.

This is why a non compete agreement buying a business acts as deal insurance. It establishes a legal perimeter around the business, giving you the breathing room to build direct relationships with customers and staff.

Furthermore, having a robust non-compete is rarely optional if you rely on outside financing. Commercial banks and SBA lenders almost universally require a signed seller non-compete as a mandatory condition for business acquisition loans. Lenders want to ensure their collateral—the business's cash flow—is protected from immediate, direct competition by the very person who built it.

To help structure these protections, buyers and sellers often rely on standardized templates like this M&A Non-Compete Agreement Template to kickstart their negotiations before finalizing the language with their legal team.

Key Enforceability Factors: Duration, Geography, and the FTC Rule

Just because a seller signs a non-compete does not automatically mean a court will enforce it. For a restrictive covenant to hold up under judicial review, it must protect a legitimate business interest—such as goodwill, trade secrets, or confidential customer lists.

If a court determines that a non-compete is overly broad, it risks being modified or struck down entirely. In many jurisdictions, courts apply the "blue-pencil doctrine," which allows a judge to strike out or rewrite unreasonable terms while keeping the rest of the agreement intact. However, in "all-or-nothing" states, a single overreaching clause can cause a judge to throw out the entire agreement, leaving the buyer completely unprotected.

To understand the foundational mechanics of how these restrictions operate, it is helpful to look at general guidelines surrounding Understanding Non-Competes in Business Acquisitions.

Determining a Reasonable Duration for a Non Compete Agreement Buying a Business

What is a reasonable timeframe for a seller restriction? In M&A, the standard "sweet spot" is three to five years.

Several key factors determine where your agreement should land within this window:

• Deal Size: Smaller transactions (under $2 million) typically lean toward a shorter duration of two to three years, while mid-market or larger acquisitions routinely command five-year terms.
• Transition and Consulting Agreements: If the seller is staying on as a paid consultant for 12 months post-closing to help transition client accounts, the non-compete period should ideally begin after their active consulting role ends.
• Personal Brand Influence: If the business relies heavily on the seller's personal reputation (e.g., a founder-led consulting firm), a longer duration is easier to justify because it takes more time for the buyer to establish independent credibility.

For more details on structuring these timelines, you can refer to the 2026 Guide to M&A Non-Competes.

Defining Geographic Scope and the FTC M&A Carve-Out

The geographic scope of a non-compete must mirror the actual market footprint where the business operates. If you are buying a local bakery in Royal Oak, MI, restricting the seller from operating a bakery anywhere in North America is wildly unreasonable and unenforceable. A 5- to 10-mile radius is far more appropriate. Conversely, if you are buying a niche digital software business with a national customer base, a nationwide geographic restriction is entirely defensible.

It is also critical to address the modern regulatory landscape. In 2024, the Federal Trade Commission (FTC) issued a final rule aiming to ban most employment non-compete agreements. However, it is vital to know that the FTC non-compete ban does not apply to the bona fide sale of a business.

The FTC explicitly carved out an exception for M&A transactions. This means that while employer-employee non-competes face intense federal and state scrutiny, restrictions placed on a departing business owner remain fully legal and enforceable across all 50 states. To read the official language regarding this exemption, you can review The Founder Non-Compete in 2026.

Tax Implications and Purchase Price Allocation

How you structure the financial aspects of a non-compete in your purchase agreement has massive tax implications for both parties. In an asset sale, the IRS requires the buyer and seller to agree on a purchase price allocation using IRS Form 8594.

This allocation is a classic tug-of-war:

• The Buyer's Perspective: Buyers prefer a higher allocation to the non-compete because under IRS Section 197, they can amortize the cost of the non-compete over 15 years as an intangible asset, reducing their taxable income.
• The Seller's Perspective: Sellers generally prefer a lower allocation. Why? Because any funds allocated directly to a non-compete agreement are taxed as ordinary income (which can reach up to 37% in 2026), whereas funds allocated to the business assets or goodwill are taxed at the much lower capital gains rate (typically 15% to 20%).

Because of this tax disparity, sophisticated sellers will often negotiate for a lower purchase price allocation to the non-compete in exchange for a slightly longer duration or a higher overall purchase price. For official IRS guidelines on how these transactions are handled, check the Non-Compete Tax Treatment resources.

Non-Compete vs. Non-Solicitation Clauses in M&A

When buying a business, a non-compete clause is rarely drafted in isolation. It is almost always paired with non-solicitation clauses to create layered protection.

Understanding the distinction between these two mechanisms is essential:

A customer non-solicitation clause prevents the seller from reaching out to their old client list and inviting them to follow them to a new venture. Meanwhile, an employee non-solicitation clause stops the seller from hiring away key managers, technicians, or sales reps to staff their next project.

Because non-solicitation agreements target specific, bad-faith actions rather than a person's general right to earn a living, they are often much easier to enforce in court. We highly recommend utilizing both. To learn more about how these clauses interact under Michigan law, you can read our detailed breakdowns on Noncompete vs Nonsolicitation in Michigan and Noncompete vs Nonsolicit Limits.

State-Specific Rules: Michigan, California, and Florida

While the FTC has left business-sale non-competes to the states, the legal landscape across the country is a patchwork of different standards.

For example, California Business and Professions Code Section 16601 explicitly permits non-competes for business sales where the owner sells substantially all of the business's goodwill—even though California strictly bans employment non-competes. Meanwhile, Florida Statutes Section 542.335 is highly friendly to buyers, establishing a legal presumption that a business sale non-compete is reasonable for up to 7 years. In contrast, Illinois courts routinely hold that five years is the maximum reasonable limit for restricting a seller.

If you are drafting a multi-state agreement, you can review a standard framework in this Sale of a Business Non-Compete PDF to see how state-specific terms are generally structured.

Enforcing a Non Compete Agreement Buying a Business in Michigan

If you are buying or selling a business in Southfield, Troy, Farmington Hills, or Detroit, Michigan law governs your agreement. Under MCL Section 445.774a, a non-compete agreement is enforceable in Michigan if it:

1. Serves to protect a legitimate business interest (such as customer goodwill or trade secrets).
2. Is reasonable in its duration, geographic area, and the line of business being restricted.

Michigan courts are generally willing to enforce well-drafted business-sale non-competes lasting between three and five years, provided the geographic boundary aligns with the business's actual footprint in Oakland County or the wider Detroit metro area.

However, if you draft an overbroad agreement—such as restricting a local Southfield dry cleaner from operating anywhere in the State of Michigan—a Michigan judge may use their judicial discretion to shrink the geographic scope or void the clause entirely.

To ensure complete protection, we also recommend pairing your non-compete with strong confidentiality agreements to protect proprietary data, customer lists, and software. You can learn more about how these agreements function locally by reviewing our guide on Confidentiality Agreements in Michigan.

Frequently Asked Questions about Business Sale Non-Competes

What happens if a seller violates the non-compete after the sale?

If a buyer discovers that the seller has breached their non-compete—such as opening a competing shop or soliciting former clients—they must act quickly. The primary legal remedy is seeking injunctive relief. A judge can issue a temporary restraining order or preliminary injunction to halt the seller's competitive activities immediately while the lawsuit proceeds.

Additionally, the buyer can sue for monetary damages to recover lost profits, and if the agreement was drafted correctly, recover reasonable attorney fees and court costs.

Does the FTC non-compete ban apply to business acquisitions?

No. The FTC’s 2024 final rule (16 CFR Part 910) targets the employer-employee relationship to protect worker mobility. It explicitly excludes non-competes entered into in connection with a "bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets."

Can a seller negotiate carve-outs in a business sale non-compete?

Absolutely. Restrictive covenants are highly negotiable. Standard carve-outs for sellers include:

• Passive Investments: Allowing the seller to own a small percentage (typically less than 5%) of a publicly traded competitor.
• Unrelated Industries: Ensuring the seller is only restricted from the specific line of business sold, rather than the entire industry.
• Consulting/Teaching: Explicitly permitting the seller to teach, write, or consult in non-competing fields.

Conclusion

Buying a business is a major milestone, but failing to secure an enforceable non-compete can turn your dream acquisition into a legal and financial nightmare. Whether you are a buyer looking to safeguard your newly purchased goodwill, or a seller trying to protect your future career options and optimize your tax position, you need experienced legal counsel in your corner.

At Scott Batey Law, located in Bingham Farms, MI, we bring over 25 years of personalized, award-winning representation to clients across Southfield, Birmingham, Troy, and Oakland County. We understand the local Michigan business landscape and know exactly how to draft and negotiate restrictive covenants that hold up in court.

Don't leave your business transition to chance. Contact a Noncompete Agreement Attorney Southfield MI today, and let us help you secure your investment.