Non-Competes, Employees, and Key Contracts in a Business Sale
| John M. McCormick | business, Mergers & Acquisitions
Quick Answer
Non-compete agreements tied to the sale of a business are generally viewed more favorably by courts than ordinary employee non-competes, because the buyer is paying for the goodwill the seller is promising not to take back. They must still be reasonable in duration, geographic area, and scope of restricted activity, and state law varies significantly. Buyers also need to plan for employees and key contracts, since the value of a business often depends on who stays and which agreements transfer.
This article is part of our Legal Guide to Buying or Selling a Business.
Why Do Buyers Require a Non-Compete?
When a buyer pays for goodwill, it is paying for customer relationships and reputation the seller built. Without a non-compete, the seller could open a competing business down the street and pull those customers back. Non-solicitation and confidentiality provisions add protection for employees, customers, and trade secrets.
How Is a Sale-of-Business Non-Compete Different From an Employee Non-Compete?
Courts in many states apply a more lenient standard to non-competes given in connection with a sale, because the seller received payment and has more bargaining power than a typical employee. Even some states that sharply restrict employee non-competes have exceptions for the sale of a business. When the seller also signs an employment or consulting agreement, courts in Virginia and North Carolina look at what each covenant actually protects and what consideration supports it, not just which document contains it. A promise backed by the purchase price that protects the goodwill being sold has the strongest claim to the more lenient sale standard. A restriction whose scope and duration mainly track the seller's post-closing job may be judged under the stricter employee standard, even if it is signed at closing. Drafting matters: the seller's non-compete should be tied expressly to the purchase price and the goodwill transferred.
What Makes a Non-Compete Reasonable?
| Factor | Questions to Ask |
|---|---|
| Duration | Is the period tied to the time needed for the buyer to secure the goodwill it purchased? |
| Geography | Does the area match where the business actually operates and serves customers? |
| Restricted activity | Is it limited to the type of business sold, rather than all work the seller could do? |
| Consideration | Is the restriction clearly part of what the buyer paid for? |
Non-Competes in Virginia
Virginia courts enforce a non-compete only if it is narrowly drawn to protect a legitimate business interest, is not unduly burdensome, and does not violate public policy. Function, geography, and duration are all examined, and an overbroad description of the restricted activity can sink an otherwise reasonable covenant, as the Supreme Court of Virginia held in Home Paramount Pest Control Cos. v. Shaffer (2011). Virginia courts do not rewrite overbroad covenants, so drafting precision matters.
For a genuine sale of a business, the Supreme Court of Virginia has said that a greater scope of restraint is permissible than in an employment relationship (Richardson v. Paxton Co., 1962). That latitude is not unlimited: courts still look at the restricted activity, territory, and duration in light of the goodwill purchased, and a 2026 Virginia Court of Appeals decision left open exactly how the sale-of-business standard differs from the employment standard. Federal courts applying Virginia law have asked whether a covenant is more attributable to the sale of goodwill or to employment, which is why a seller's non-compete belongs in the purchase agreement rather than only in a later employment agreement.
Virginia also prohibits non-competes with "low-wage employees" (Va. Code § 40.1-28.7:8). Effective July 1, 2025, that definition includes all employees who are non-exempt under the Fair Labor Standards Act, regardless of pay. Buyers who plan to have rank-and-file employees sign new agreements after closing need to account for this. The statute has no general exception for sellers, so a seller who stays on as a non-exempt employee after closing presents a real risk, even if the non-compete appears in the purchase documents. Our Virginia guide covers other state-specific issues in a sale.
Non-Competes in North Carolina
A North Carolina non-compete must be in writing and signed by the person agreeing not to compete (N.C. Gen. Stat. § 75-4). North Carolina courts have long applied a more relaxed standard to non-competes given in the sale of a business than to employee covenants, but the covenant still must be reasonable in time and territory. That treatment can reach a restriction tied to the seller's continued work after closing: in Kennedy v. Kennedy (N.C. Ct. App. 2003), the court analyzed a selling dentist's service and restrictive covenant agreements as part of an integrated sale and found the restriction likely enforceable. North Carolina also follows a strict blue pencil rule: a court may strike clearly separable unreasonable provisions but cannot rewrite an overbroad restriction. In Beverage Systems of the Carolinas, LLC v. Associated Beverage Repair, LLC (2016), the Supreme Court of North Carolina held that this rule applies even when the parties to a sale-of-business covenant expressly authorized the court to revise it. A covenant drafted too broadly can therefore fail entirely. See our guide to buying or selling a business in North Carolina for other state-specific rules.
What About Federal Law?
In 2024 the Federal Trade Commission issued a rule that would have banned most non-competes. A federal court in Texas set the entire rule aside nationwide before it took effect (Ryan, LLC v. FTC, N.D. Tex. 2024), and in September 2025 the FTC dropped its appeal and accepted that ruling, so the rule never took effect. Even the 2024 rule would have exempted non-competes given in a bona fide sale of a business, though not ordinary employee non-competes.
The FTC has since turned to case-by-case enforcement, challenging particular employers' broad non-competes as unfair methods of competition, including actions in 2025 and 2026 involving restrictions on rank-and-file workers. Those actions target specific practices, not non-competes generally, but they are one more reason to keep employee restrictions narrow after closing. Because federal and state law in this area continues to change, current law should be confirmed for every transaction.
What Happens to Employees in a Business Sale?
In a stock purchase, the company remains the employer, so employment generally continues. In an asset purchase, the seller's company typically terminates employees and the buyer offers new employment. Buyers should identify key employees early and consider retention arrangements.
Existing employee non-competes and non-solicitation agreements are handled differently depending on the structure. In a stock purchase, the employer is the same company, so those agreements generally remain in place without any assignment. In an asset purchase, the buyer should expressly acquire the seller's rights under them, but that may not provide the protection it expects. North Carolina courts have held that an asset buyer can enforce an assigned covenant, but the restricted period generally starts running at the sale, when the employee's job with the seller ends, not when the employee later leaves the buyer (Better Business Forms & Products, Inc. v. Craver, N.C. Bus. Ct. 2007). Virginia has no settled appellate rule on the point. In either state, a buyer that wants protection measured from an employee's future departure should have key employees sign new agreements supported by appropriate consideration, keeping in mind Virginia's limits on non-competes for non-exempt employees.
What About Key Contracts?
Customer agreements, supplier contracts, leases, software licenses, and permits may require consent to transfer, or may allow the other party to terminate on a change of control. These should be identified in due diligence and addressed through closing conditions, consents, or price adjustments.
Attorney Insight
I draft sale non-competes to be defensible, not maximal. A buyer is better protected by a reasonable restriction a court will enforce than by an aggressive one that a court may throw out entirely. That is especially true in states that will not rewrite an overbroad clause.
Frequently Asked Questions
How long can a non-compete last after selling a business?
There is no single answer. Courts look at whether the duration is reasonable to protect the goodwill purchased, under the applicable state's law.
Can a seller still work in the industry after a sale?
Often yes, outside the restricted scope, area, and period. The specific language controls.
Do employees have to sign new agreements after a sale?
In an asset purchase, it is usually wise, because the employees become new employees of the buyer and any assigned restrictions may run out on their original schedule. In a stock purchase, existing agreements generally continue, but they should be reviewed for enforceability and fit.
Continue Reading
- The Legal Guide to Buying or Selling a Business (start here)
- Asset Purchase vs. Stock Purchase: Choosing the Right Deal Structure
- Letters of Intent in Business Acquisitions: What Is Binding and What Is Not
- Legal Due Diligence Checklist for Buying a Business
- Reps, Warranties, and Indemnification in a Purchase Agreement
- Earnouts and Seller Financing: Bridging a Valuation Gap
- Buying a Business With an SBA Loan: The Legal Steps
- How to Prepare Your Business for Sale: A Legal Checklist
- Buying or Selling a Business in Virginia
- Buying or Selling a Business in North Carolina
Talk With an M&A Attorney Before You Sign
McCormick Law & Consulting represents buyers and sellers in business acquisitions, primarily in Virginia and North Carolina and in transactions that cross state lines. The transactions in which we have represented a party total hundreds of millions of dollars in combined deal value, a measure of the size of those deals, not of amounts recovered or earned for clients. We have formed roughly a thousand new business entities and currently represent hundreds of businesses, so we approach every deal from the operating side as well as the legal side. Every transaction is different, and the size or outcome of past deals does not predict the result in yours.
With offices in Norfolk, Virginia and Raleigh, North Carolina, we handle most of our transactions in those two states and also assist clients with multistate transactions. If you are buying or selling a business, a short call early in the process can save time, money, and leverage later. Learn more about our mergers and acquisitions practice.
This article provides general information only. It is not legal, tax, or financial advice and does not create an attorney-client relationship. Laws differ by state and change over time. Our attorneys are licensed in Virginia and North Carolina. We assist clients with business transactions involving multiple states. For matters involving the law of a state where we are not licensed, we associate with appropriately licensed counsel or otherwise proceed only as permitted by applicable law.