Non-compete and non-solicitation agreements are standard components of virtually every lower middle market business sale. When a buyer pays $5M, $10M, or $20M for your company, they need legal protection ensuring you will not immediately start a competing business, recruit your former employees, or contact your former customers. Understanding what these agreements typically look like, what is negotiable, and where sellers commonly make mistakes is essential preparation for any exit.
What Non-Compete Agreements Cover
A non-compete agreement in the context of a business sale restricts the seller from engaging in a competing business within a defined geographic area for a defined period of time after closing. The three key parameters are scope, geography, and duration.
Scope defines what activities you are restricted from performing. This typically includes owning, operating, managing, consulting for, or holding a financial interest in any business that competes directly with the company you sold. The definition of "competing business" should be carefully negotiated — overly broad definitions can prevent you from pursuing legitimate opportunities that do not actually compete with the buyer.
Geography defines where the restrictions apply. For businesses that operate locally or regionally, the geographic restriction typically mirrors the company’s actual market footprint plus a reasonable buffer — a 50-mile radius, a specific state, or a defined list of metro areas. For businesses with national or digital customer bases, the geographic scope may be nationwide or unlimited, which is harder to enforce but more commonly requested.
Duration defines how long the restrictions last. In the lower middle market, non-compete periods typically range from two to five years. Three years is the most common standard. Courts in most states will enforce reasonable durations but may refuse to enforce restrictions they deem excessively long relative to the legitimate business interest being protected.
What Non-Solicitation Agreements Cover
Non-solicitation agreements are separate from non-competes and address two specific concerns: employees and customers.
An employee non-solicitation prevents you from recruiting, hiring, or inducing employees of the sold business to leave for a specified period. This protects the buyer’s investment in the workforce they acquired and prevents the seller from gutting the management team to staff a new venture.
A customer non-solicitation prevents you from contacting, soliciting, or doing business with customers of the sold company. This is often broader than the non-compete because it applies regardless of whether you are operating a competing business. Even if you start an entirely different type of company, you may be restricted from approaching the customer base you built.
The duration of non-solicitation agreements typically matches or exceeds the non-compete period — two to five years for employees, and often the same for customers.
What Is Negotiable
Sellers often assume these agreements are take-it-or-leave-it provisions. They are not. Several elements are regularly negotiated.
Carve-outs for specific activities. If you have investments, board seats, advisory roles, or business interests that are not competitive with the sold business, these should be explicitly carved out of the non-compete. The purchase agreement should include a schedule of permitted activities that are excluded from the restrictions.
Passive investment exceptions. Most non-competes include an exception for passive investments — typically defined as owning less than 5% of a publicly traded company or a small minority stake in a non-competing private business. This is standard and should always be included.
Geographic limitations. If your business only operates in Tennessee and the surrounding states, there is no legitimate basis for a nationwide non-compete. Push back on geographic scope that extends beyond the business’s actual market presence.
Duration reductions. If the buyer is requesting five years, negotiate for three. If they want three, push for two with an option to extend tied to earnout payments or other contingent consideration. The shorter the restriction, the sooner you can pursue new opportunities.
Consideration. In many states, a non-compete must be supported by adequate consideration — meaning you must receive something of value in exchange for agreeing to the restrictions. In the context of a business sale, the purchase price itself typically constitutes sufficient consideration. However, if the non-compete extends to family members or if the scope is unusually broad, you may negotiate for a specific allocation of the purchase price to the non-compete. This has tax implications — payments allocated to non-compete agreements are typically treated as ordinary income rather than capital gains, so the allocation should be discussed with your tax advisor.
State-by-State Enforceability
Non-compete enforceability varies significantly by state. Some states — notably California, North Dakota, Minnesota, and Oklahoma — severely restrict or prohibit enforcement of non-compete agreements, even in the context of business sales. California, in particular, has a strong public policy against non-competes, although courts have sometimes upheld restrictions in the narrow context of a sale of business goodwill.
Tennessee, where Icon Business Advisors is based, enforces non-compete agreements if they are reasonable in scope, duration, and geography, and supported by adequate consideration. Tennessee courts use a balancing test that weighs the legitimate business interest being protected against the restriction on the seller’s ability to earn a livelihood.
For sellers operating in multiple states or selling businesses with multi-state operations, the choice of law provision in the purchase agreement — which state’s laws govern the non-compete — can be a meaningful negotiation point.
Common Mistakes Sellers Make
Signing without reading carefully. Non-competes are often buried in the purchase agreement as a section within the broader restrictive covenants article. Sellers who are focused on the purchase price and major deal terms sometimes fail to scrutinize the non-compete language until after closing — at which point it is too late.
Failing to negotiate carve-outs for planned activities. If you know you want to invest in real estate, join a startup board, or launch a business in a non-competing industry after the sale, get those activities carved out explicitly. Do not rely on the argument that they "clearly" do not compete — get it in writing.
Ignoring the non-solicitation provisions. The non-solicitation of customers and employees can be more restrictive in practice than the non-compete itself. If you plan to remain active in your industry, a broad customer non-solicitation effectively prevents you from leveraging the relationships you spent decades building.
Not considering the tax allocation. How the purchase price is allocated between business goodwill (capital gains treatment) and the non-compete agreement (ordinary income treatment) directly impacts your after-tax proceeds. The allocation should be negotiated as part of the overall deal structure.
The Bottom Line
Non-compete and non-solicitation agreements are a necessary and expected part of selling a business. They protect the buyer’s investment and are not inherently adversarial. However, the specific terms — scope, geography, duration, carve-outs, and consideration — are all negotiable and have real financial and personal impact on your life after the sale.
Negotiate these provisions with the same attention you give to the purchase price. Work with M&A counsel who understands the enforceability standards in your state and can protect your interests without killing the deal.
If you are considering an exit and want to understand how restrictive covenants will factor into your deal, schedule a conversation with Icon Business Advisors. We help sellers negotiate every component of the transaction — including the terms that affect what you can do after the closing.