A seller's non-compete is a promise, usually signed with the sale, not to run or help a competing business for a set time and area. Courts often treat these promises more kindly than employee non-competes, because they protect the goodwill you paid for, but how far they are enforced depends on state law. A transition (consulting) agreement is a separate contract in which the seller stays on for a while to hand over customers, staff and know-how. This primer is for buyers negotiating both, including buyers using a Small Business Administration (SBA) loan.
The short answer
- The Federal Trade Commission's (FTC) nationwide non-compete ban is gone: a federal court set it aside in 2024 and the FTC removed it in February 2026. A seller's non-compete is governed mainly by state law.
- State law varies widely, even for sale-of-business covenants, and law firms report several state changes in 2026. Ask counsel about the law of the seller's state and the business's state.
- A non-solicit (a promise not to solicit employees, customers or vendors) is a separate and often narrower restriction.
- In an Initial Acquisition or Business Expansion financed with an SBA 7(a) loan, the seller generally cannot stay as an officer, director, stockholder or employee in a full change of ownership, but for loans numbered on or after October 1, 2026 the business can hire the seller as a consultant for up to 24 months in total.
- A consultant is often not an insured under your policies, and business insurance generally does not pay you if a seller breaches a non-compete.
What is a seller non-compete, and why is it in the deal?
You are paying for customer relationships, a name and a reputation. If the seller can open next door the week after closing, you may have bought less than you thought. Three separate promises often appear together:
- Non-compete. The seller will not run, own or work for a competing business for a set time within a set area.
- Non-solicit. The seller will not recruit your employees or approach your customers or vendors. It is often narrower than a non-compete, and there is no neutral standard for its terms.
- Confidentiality. The seller will not use or share customer lists, pricing and processes.
Courts have long treated a seller's promise not to compete (a covenant, in contract terms) as more acceptable than an employee's, because it protects the goodwill the buyer paid for. What counts as reasonable in time, place and activity is decided state by state.
The covenant is also an asset in the deal. Money allocated to it has tax effects for both sides, and SBA allows intangible assets such as agreements not to compete to be financed when its financial due diligence requirements are met. How much to allocate is a negotiation and a question for your tax advisor.
Does the FTC non-compete rule still apply to a seller's non-compete?
No. The federal rule is gone, so a seller's non-compete is governed mainly by state law and antitrust law. Whether your seller's covenant is enforceable is a state-law question for your deal counsel. Here is the federal timeline, as of October 2026:
| Date | What happened |
|---|---|
| May 7, 2024 | The FTC published its Non-Compete Clause Rule. It exempted non-competes entered into under a bona fide sale of a business |
| August 20, 2024 | A federal court in the Northern District of Texas (Ryan, LLC v. FTC) held the rule unlawful and set it aside nationwide |
| February 12, 2026 | The FTC removed the rule from the Code of Federal Regulations in a final rule |
In between, the FTC voted 3 to 1 in September 2025 to dismiss its appeals and accept the court's decision, and as of October 2026 no federal non-compete rule is in effect and no appeal is pending. The FTC still pursues specific non-competes case by case under Section 5 of the FTC Act, but the actions it lists involve employee non-competes, not seller covenants in a business sale. Even the 2024 rule said sale-of-business non-competes remain subject to federal and state antitrust laws. Recheck the FTC's non-compete page before you rely on this, because the picture could change.
Does my state allow a seller non-compete?
Rules differ a great deal, and your counsel must read your state's current law. These examples are not a survey of the states:
- North Dakota voids restraints on business. It allows one exception: a person who sells the goodwill of a business may agree with the buyer not to carry on a similar business within a reasonable geographic area and for a reasonable length of time, if the buyer carries on a like business there. (This paraphrases the statute.)
- Minnesota voids non-competes in contracts generally under a 2023 law. A covenant agreed upon during the sale of a business is valid, limited to a reasonable geographic area and length of time. (This paraphrases the statute.)
- California has a statutory exception for sellers of goodwill. Whether it reaches partial sales is a question for California counsel.
Law firm summaries from 2026 (not statute text) describe new or changed non-compete laws in several states, including Tennessee, Washington and Virginia, and report that at least one reaches covenants signed before it takes effect. Details, thresholds and exceptions differ and are still being worked out, so have local counsel read the current statute. Also ask whether a seller covenant placed inside an employment or consulting agreement is judged under the employment rules or the sale-of-business rules. That depends on drafting and state law. Whether a judge will narrow an overbroad covenant instead of throwing it out also varies by state.
What should the non-compete and non-solicit actually say?
One sell-side advisory firm says seller non-competes in its deals usually run three to five years, with a geography that matches the market the business serves. That is one firm's experience, not a standard. Counsel should set each term for your deal and your state.
| Term | What it sets | What to ask |
|---|---|---|
| Duration | How long the restriction lasts | Does it start at closing or when a seller note is paid off? |
| Geography | Where the seller may not compete | Does it match where customers really are? |
| Competitive business | What activity is restricted | Is it defined by services and customers rather than a vague "similar business"? |
| Who signs | Which owners, family members or spouses are bound | Is anyone who profits from the sale left out? |
| Non-solicit | Employees, customers and vendors the seller may not approach | Are named accounts or classes of people listed? |
| Remedies | Injunction, damages, fee shifting | Does the agreement say what happens if the seller breaches? |
| Successors | Whether a later buyer of your company can enforce it | Is the covenant assignable, which matters at your exit? |
| Governing law and place | Which state's law and courts apply | Is the choice sensible for where the seller lives and works? |
What goes in a transition or consulting agreement?
A transition agreement says how the seller helps you take over: introductions to customers and vendors, training, access to systems and, where relevant, a license holder to cover the handover. It is different from a transition services agreement, in which the seller's company keeps providing services such as payroll or IT.
If you use an SBA 7(a) loan for a full change of ownership, SBA's rulebook, Standard Operating Procedure (SOP) 50 10 8.1 (effective October 1, 2026), says the seller may not stay on as an officer, director, stockholder or employee. For loans numbered on or after October 1, 2026, the business may hire the seller as a consultant for up to 24 months in total, including extensions. Earlier loans follow the previous rules, which capped it at 12 months. Ask your lender which applies. Partial buyouts follow different rules.
The rulebook does not say whether a consulting seller can be the person whose license the business operates under (the qualifier). That is a state licensing question. See when the seller holds the contractor license.
| Term | What to settle | Insurance angle |
|---|---|---|
| Status and control | Consultant or employee (with an SBA full change of ownership the seller generally cannot be an employee), and who directs the work | The label does not decide it: state tests of control, the facts and the policy definitions decide who is insured and whether workers' comp applies |
| Duties and authority | Advice only, or customer contact, supervision or signing | May limit claims arising from what the seller does |
| Handover milestones | Customer introductions, vendor introductions, training, documented processes | Gives you evidence if a customer later disputes who was responsible |
| Access | Bank accounts, systems and passwords stay with you | Can help reduce theft and cyber exposure |
| Insurance each side carries | Auto, liability or workers' comp for the seller's own work | May fill gaps your policies leave, depending on the other party's coverage and your policy wording |
| End date | A defined term inside the lender's limit | Lets you remove the seller from policies on a known date |
How does the seller staying on change your insurance?
A seller who stays on as an independent consultant is often not an insured (a person the policy protects) the way an employee is. A claim that a customer relied on the seller's advice is usually a professional liability (errors and omissions) question, not a general liability one, and whether a professional liability policy covers advice from an independent consultant depends on how it defines who is insured. Ask your broker before the consulting period starts. The details are in the seller stays on as a consultant: are they covered?
Four points belong in your checklist:
- Remove the seller where they no longer hold the role. Take them off policies as an officer or driver where that is no longer true, and add them only where you have agreed in writing. See do your policies still list the seller?
- Workers' compensation. If the consultant does hands-on work and has no workers' comp coverage of their own, the insurer may count their pay at audit. Whether it does depends on the policy and your state's rules, so ask your broker what proof of coverage to collect.
- Crime coverage. If the seller handles money, check how the policy defines an employee and whether a former owner is included.
- A non-compete is not insurance. If a seller breaches it, enforcement is a lawsuit. Business income insurance responds to physical damage, not to lost customers, and liability policies generally respond to claims against you, not to the cost of enforcing your own contract.
Insurance is one reason to settle the covenant carefully, because it does not stand behind it.
A hypothetical example. A buyer pays $2,500,000 for a regional services company with SBA financing. The seller signs a three-year non-compete limited to three named counties, plus a 12 month consulting agreement. In month 6 the seller starts a similar company in a fourth, neighboring county, where the buyer also has customers, and contacts three of them. The buyer's counsel checks whether that county falls inside the covenant's geography, whether the non-solicit covers those customers, what the remedies clause allows and whether the state's law supports enforcing it. The buyer's broker reviews the buyer's policies and confirms that, as written, none is designed to pay for lost customers or the cost of enforcing the covenant. Figures and facts are illustrative only.
The lesson: whether you can enforce the covenant turns on its wording and your state's law, and insurance does not stand behind it, so those terms are worth settling with counsel before closing and not after the seller has moved.
What should you ask deal counsel and your lender?
- Deal counsel: Which state's law governs the covenant, and is it likely to be enforced there? Should the non-compete sit in the purchase agreement or a separate document? Who must sign? How are non-solicits and confidentiality drafted? Does the 2026 state legislation affect my deal?
- Tax advisor: How should the price be allocated to the covenant, and what are the tax effects for each side?
- Lender: Does my loan allow the seller to stay on as a consultant, for how long, and who will hold any license the business needs?
- Insurance broker: Is the seller an insured under any policy during the consulting period? What changes when it ends?
The purchase agreement is where these promises usually live. See what a business purchase agreement covers and key employees leaving after an acquisition for the people side.
Keep reading
- The Seller Stays On as a Consultant: Are They Covered?
- Transition Services Agreements and Insurance: Who Covers What
- When the Seller Holds the Contractor License: Insurance and Bond Risks
- Key Employees Leaving After an Acquisition: Insurance and Retention
- What a Business Purchase Agreement Covers
- All guides for new business owners
Frequently asked questions
Is the FTC non-compete ban in effect?
No. A federal court set the rule aside in August 2024, the FTC dropped its appeals in September 2025 and the FTC removed the rule from the Code of Federal Regulations in February 2026. Non-competes are governed by state law and antitrust law. The FTC still acts case by case, so check its non-compete page before you rely on this.
Can the seller compete with me after I buy the business?
Only if the agreement and state law allow it. A seller non-compete, a non-solicit and confidentiality terms usually limit what the seller can do, but their scope and enforceability depend on state law and drafting. Your deal counsel should write them for the states involved.
How long should a seller non-compete last?
There is no standard length. One sell-side advisory firm reports three to five years in its deals, and state law may treat different lengths differently. Ask your counsel what is reasonable for your business and your state.
The seller wants to stay on for a year. Can they, with an SBA loan?
That depends on your financing. With an SBA 7(a) loan for a full change of ownership, the seller generally cannot stay as an officer, director, stockholder or employee, but for loans numbered on or after October 1, 2026 the business can hire the seller as a consultant for up to 24 months in total. Earlier loans follow the previous rules, which capped it at 12 months. Other loans and partial buyouts follow different rules.
Does my business insurance cover a seller who breaks the non-compete?
Generally no. Business insurance does not usually pay for lost customers or for the cost of enforcing your own contract rights. Your remedies are in the agreement and in court, so draft remedies and the covenant carefully with counsel.
References
- Federal Trade Commission: Revision of the Negative Option Rule, Withdrawal of the CARS Rule, Removal of the Non-Compete Rule, 91 FR 6507 (February 12, 2026)
- Federal Trade Commission: Non-Compete Clause Rule, final rule, 89 FR 38342 (May 7, 2024)
- Federal Trade Commission: Noncompete page (dated list of actions)
- Foley & Lardner: Noncompete Agreements in 2026, A Federal and State Overview (July 13, 2026)
- CGL LLP: 2026 State Non-Compete Laws, What Changed and Where It May Reach a Sale (October 1, 2026)
- North Dakota Century Code 9-08-06 (title 9, chapter 9-08)
- Minnesota Statutes 181.988, Covenants not to compete (Office of the Revisor of Statutes)
- California Legislative Information: Business and Professions Code section 16601
- Morgan & Westfield: Acquired, Ch. 22, Non-Compete Agreements (sell-side advisory firm, 2026)
- U.S. Small Business Administration: SOP 50 10 8.1, Lender and Development Company Loan Programs (effective Oct 1, 2026), Appendix 15
- IRS: About Form 8594, Asset Acquisition Statement Under Section 1060
Just bought a business? Get your insurance reviewed.
Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.
Morrow · 25 New Chardon Street, 4th Floor, Boston, MA 02114
This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.