Noncompetes and Transition Agreements After a Business Sale

By Hank FasthoffJuly 6, 2026

A buyer that pays for a business's goodwill expects the seller to leave its customer relationships, workforce, reputation, and operating knowledge with the business. A seller who opens a competing company after closing can redirect those relationships before the buyer has time to establish them. Sale agreements address that risk through noncompetition and nonsolicitation covenants, while transition services and consulting agreements define the seller's permitted post-closing work.

Those provisions should operate as one package. A covenant may prohibit the same services that a consulting agreement requires. A transition services agreement may give the seller access to customer data that the purchase agreement treats as confidential. Compensation allocated to services may also produce a different tax and employment result from consideration paid for the business. You should settle those points before signing the purchase agreement.

Protect the Goodwill the Buyer Acquired

A sale covenant should protect the goodwill and business interests transferred at closing. The purchase agreement should identify the acquired business by its products, services, customers, territory, and operating history. Definitions copied from a broad corporate purpose clause can prohibit activities far beyond the business the seller sold.

Your transaction structure affects which sellers should sign the covenant. In an equity sale, each owner whose relationships or reputation contribute to the acquired goodwill may present a competitive risk. In an asset sale, the selling entity may own the transferred goodwill, while one or more individuals control the customer and employee relationships that give it value. Binding only an entity that will dissolve after closing provides little practical protection.

You should also distinguish ownership from employment. A passive investment in a publicly traded competitor presents a different risk from operating, managing, financing, or advising a competing business. Carveouts should cover permitted investments, existing businesses disclosed before signing, activities outside the acquired business, and services the seller will perform for the buyer after closing.

Apply the Texas Statutory Test

Texas Business and Commerce Code Section 15.50 makes a covenant enforceable when it's ancillary to or part of an otherwise enforceable agreement at the time the agreement is made and contains reasonable limits on time, geographic area, and restrained activity. Those limits can't impose a greater restraint than necessary to protect the buyer's goodwill or other business interest.

A purchase agreement ordinarily supplies the enforceable agreement and identifies the goodwill the buyer acquired. In *Marsh USA Inc. v. Cook*, 354 S.W.3d 764 (Tex. 2011), the Texas Supreme Court required a reasonable relationship between the covenant and the business interest it protects. Purchased goodwill provides a strong basis for that relationship, but the covenant's restrictions must match the acquired business.

Section 15.51(b) assigns the burden of proving reasonableness according to the agreement's primary purpose. When personal services are the primary purpose, the buyer must prove that the covenant meets Section 15.50. When the agreement has a different primary purpose, the seller must prove that it fails the statutory test. A purchase agreement centered on the sale of a business ordinarily belongs in the second category, but a nominal sale wrapped around an employment or consulting relationship can present a different record.

Texas evaluates time and geography from the transaction facts rather than a preset number of years, miles, counties, or states. In *Oliver v. Rogers, 976 S.W.2d 792, 801 (Tex. App. Houston [1st Dist.] 1998, no pet.), the First Court of Appeals concluded on summary judgment that the lack of a fixed time limit didn't make the covenant unreasonable by itself. The court considered the covenant's practical duration limits, the geographic boundary, the parties' continuing obligations, and the burden assigned by the statute then in effect. Oliver* provides a narrow, fact-specific ruling rather than a presumption that an unlimited covenant is reasonable.

Define Activity, Territory, and Duration

Restricted activity should follow the revenue sources and services transferred at closing. If the target sells commercial air conditioning maintenance, a covenant covering every construction trade restrains activity beyond the acquired business. The definition should account for product lines, customer classes, sales channels, and services the buyer excluded from the acquisition.

Geography should follow the area in which the business operated or developed goodwill. A physical service business may support counties, metropolitan areas, or other identified service territories. A software or online business may require a broader territory, but the agreement should connect that territory to actual customers, sales, and competitive activity. Named customers or market segments can sharpen the restriction, while Section 15.50 continues to require a reasonable geographic limit.

Duration should reflect the time reasonably needed to protect the acquired goodwill. Customer renewal cycles, contract terms, referral patterns, regulatory approvals, and the seller's role in customer retention provide better support than a market convention. You should also state when the period begins, whether a breach suspends the running period to the extent permitted by governing law, and what happens if the buyer stops operating or sells the acquired business.

Account for Reformation and Remedies

Section 15.51(c) requires a Texas court to reform an otherwise valid covenant whose time, territory, or activity restrictions are unreasonable. The court then enforces the covenant as reformed. Reformation prevents the entire provision from failing, while aggressive drafting sacrifices remedies.

When reformation is required, Section 15.51(c) bars damages for a breach that occurred before the court reformed the covenant and limits the buyer to injunctive relief for that period. The separate attorney fee provision applies only when personal services are the agreement's primary purpose and the seller proves the additional statutory elements. Your drafting should preserve the best available damages claim by matching the covenant to the business at signing.

The purchase agreement should coordinate equitable relief, damages, indemnification, escrow rights, earnout provisions, and any contractual right of setoff. A buyer should state whether a general indemnity covers breach of a restrictive covenant and how it interacts with equitable relief. A seller should identify any provision that lets the buyer suspend an earnout or retain escrowed proceeds based only on an alleged breach.

Review Every State Connected to the Covenant

State law varies enough that a nationwide form creates avoidable enforcement risk. You should review the seller's residence, the acquired business's territory, the places where restricted activity may occur, and the law and forum selected in the agreement. Another state may apply its public policy despite a Texas governing law clause.

California illustrates the transaction-specific analysis. Business and Professions Code Section 16600 broadly invalidates restraints on a lawful profession, trade, or business, while Section 16601 permits a covenant in specified sales of goodwill, ownership interests, operating assets, divisions, and subsidiaries. The statutory exception requires a specified geographic area where the sold business operated and continues only while the buyer or its successor operates a like business there.

California tests the transaction that occurred. Section 16601 distinguishes the sale of all of an owner's interest from a partial disposition and addresses asset sales together with goodwill. In *Samuelian v. Life Generations Healthcare, LLC*, 104 Cal. App. 5th 331 (2024), the court concluded that Section 16601 didn't govern a partial sale, then analyzed the restraint under the rule of reason applicable to that transaction. A buyer should document the transferred ownership or goodwill and draft the covenant within the applicable statutory transaction.

Use Current Federal Law

A federal district court set aside the Federal Trade Commission's 2024 Non-Compete Clause Rule before its effective date. The FTC dismissed its appeals and accepted the vacatur in September 2025, and the agency removed the rule from the Code of Federal Regulations in February 2026. As of the date of this article, enforceability depends on applicable state and federal law without a nationwide FTC rule or federal sale-of-business exception.

The FTC continues to challenge selected worker noncompetes through case-specific enforcement. Its 2026 Rollins action concerned restrictions imposed on more than 18,000 pest control employees, including technicians and customer service representatives. A negotiated covenant given by a seller for acquired goodwill presents different facts, but federal antitrust law continues to apply. You should draft for the transaction rather than rely on the withdrawn rule's former sale language.

Separate Nonsolicitation Restrictions

Customer and employee nonsolicitation provisions protect specific relationships without prohibiting every competitive activity. Texas treats restraints on customer and employee solicitation as restraints of trade governed by the Covenants Not to Compete Act when they restrict competition. Marsh applied the Act to provisions covering clients, prospective clients, former clients, and employees.

Your customer provision should identify the protected group. Possible formulations include customers transferred at closing, customers served during a stated lookback period, active prospects identified in the records, or customers with whom the seller had material contact. A restriction on accepting unsolicited business is broader than a restriction on active solicitation, so the agreement should state which conduct it covers.

Employee restrictions require the same precision. You should identify whether the covenant covers every employee, employees of the acquired business, key employees, or people with whom the seller worked. The provision should also address general advertising, recruiter searches, unsolicited applications, preexisting relationships, and hiring after the buyer terminates an employee.

Draft the Transition Services Agreement

A transition services agreement (TSA) defines the operational support a seller will provide after closing. The service schedule should identify each function, responsible personnel, service standard, location, systems access, price, invoicing procedure, and end date. Accounting, payroll, information technology, customer introductions, vendor coordination, regulatory filings, and permit transfers often require different schedules and exit dates.

Your TSA should state the buyer dependencies for each service. Completion of a data migration may depend on the buyer's selection of a replacement system, and a permit transfer may require the buyer to submit an application. Dependencies should include required information, access, personnel, approvals, third-party consents, and target dates.

Termination rights should work service by service. A buyer may replace payroll support before it can replace an enterprise system, so a single termination date can force the buyer to pay for services it no longer uses or lose services it continues to require. You should address partial termination, wind-down assistance, extension pricing, change requests, disputed invoices, and the return or deletion of data.

Liability provisions should match the service risk. The TSA should address data security, privacy obligations, insurance, third-party claims, service interruptions, intellectual property created during transition, access to facilities, and responsibility for personnel. Any liability cap or consequential damages waiver should be coordinated with the purchase agreement rather than copied from an unrelated services form.

Define the Seller's Consulting Role

A consulting agreement serves a different purpose from a TSA. Transition services support business functions, while consulting services usually rely on the seller's judgment, relationships, or industry knowledge. Your agreement should identify expected availability, customer introductions, strategic advice, deliverables, travel, expenses, authority limits, confidentiality, intellectual property, and the events that end the engagement.

You should align the consulting duties with the restrictive covenants. The seller needs permission to contact customers, vendors, and employees when the buyer requests those contacts. The covenant should permit services performed for the buyer without opening a broader exception for the seller's independent competitive activity.

Federal worker status depends on the relationship's substance regardless of an independent contractor label. The IRS considers behavioral control, financial control, and the parties' relationship, with all relevant facts considered together. The buyer's control over how the seller performs the services, payment terms, expenses, tools, benefits, duration, and the role of the services in the business can affect classification. You should structure the relationship that the parties will administer.

Coordinate Allocation and Tax Reporting

Purchase consideration and compensation for post-closing services should reflect the value of each obligation. Payments conditioned on availability, hours, performance, or continued service may receive different tax treatment from consideration paid for transferred assets or equity. The parties should model those consequences before they finalize the purchase price allocation and payment schedule.

Section 197 treats a covenant entered in connection with acquiring an interest in a trade or business as a Section 197 intangible. A buyer generally amortizes an acquired Section 197 intangible over 15 years, subject to the statute's exceptions and related rules. Goodwill and going concern value also fall within Section 197, so a buyer's general recovery period may be the same even though the assets remain separate for valuation and reporting.

An applicable asset acquisition also invokes Section 1060 and the residual allocation method. The buyer and seller generally report the allocation on Form 8594, and an agreed allocation binds both parties unless the IRS determines that it's inappropriate. The seller's character and timing depend on the transaction structure, the transferred assets, the taxpayer, the covenant, and the governing tax rules. You should determine that treatment from the complete transaction rather than assign an automatic result to every covenant payment.

The purchase agreement, consulting agreement, and TSA should use consistent allocations and reporting covenants. If the parties choose an allocation only to improve one side's tax position, they can face a valuation dispute, inconsistent returns, or recharacterization. You should support the allocation with the covenant's economic value and keep service compensation separate from purchase consideration.

Negotiate the Post-Closing Package

If you're the buyer, you should define the goodwill and competitive activity you purchased, bind the people who can redirect that goodwill, and connect the restricted territory and duration to the target's operations. You should also preserve practical remedies, service continuity, customer introductions, access to records, and authority to terminate transition services as your team assumes each function.

If you're the seller, you should limit the covenant to the business, customers, territory, and period supported by the transaction. You should protect disclosed activities, passive investments, future work outside the sold business, and services performed for the buyer. Any earnout suspension, escrow claim, fee forfeiture, tolling provision, or setoff right tied to an alleged breach requires the same attention as the covenant itself.

Both sides should compare the purchase agreement, restrictive covenant, TSA, consulting agreement, employment terms, disclosure schedules, and tax allocation before signing. Those documents should identify the seller's prohibited conduct, required services, compensation, access rights, end dates, and remedies without contradiction. The buyer purchases goodwill at closing, and the post-closing agreements determine whether the buyer receives the relationships and operating support included in the price.