Noncompete and Transition Agreements After a Business Sale: What Sellers Agree to and Why Courts Enforce Them

By Hank FasthoffJuly 6, 2026

When a buyer acquires a business, a significant portion of what it's paying for is goodwill, the company's relationships with customers, suppliers, employees, and the community. If the seller can immediately open a competing business across the street and call every customer, the goodwill the buyer purchased disappears. A noncompete agreement prevents that by restricting the seller from competing with the sold business for a defined period in a defined territory.

Sale-of-business noncompetes are treated very differently from employment noncompetes under the law. Employment noncompetes face heavy scrutiny because the employee's bargaining power is limited, the consideration is often just continued employment, and the restriction affects the person's ability to earn a living. Sale-of-business noncompetes receive favorable treatment because the seller negotiated at arm's length, received substantial consideration (the purchase price), and the restriction protects a legitimate business interest (the goodwill the buyer paid for). Sale-of-business noncompetes are enforceable in all 50 states, including California and other states that heavily restrict or prohibit employment noncompetes. And the FTC's 2024 noncompete rule doesn't apply to bona fide business sales.

Texas Enforceability Under § 15.50

In Texas, all noncompete agreements are governed by Texas Business and Commerce Code § 15.50, known as the Texas Covenants Not to Compete Act (TCNCA). Under § 15.50(a), a covenant not to compete is enforceable if it's ancillary to or part of an otherwise enforceable agreement at the time the agreement is made, and it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and don't impose a greater restraint than necessary to protect the goodwill or other business interest of the promisee.

In a sale-of-business context, the "ancillary to an otherwise enforceable agreement" requirement is easily satisfied. The noncompete is part of the purchase agreement, which is the otherwise enforceable agreement. The sale itself provides the consideration (the purchase price) and the business interest being protected (the purchased goodwill). Courts don't need to analyze whether the seller received confidential information or some other independent basis for the restriction, because the sale transaction provides all the necessary elements.

Texas courts have been more willing to enforce longer and broader noncompetes in the sale-of-business context than in employment cases. In Oliver v. Rogers, 976 S.W.2d 792, 801 (Tex. App. - Houston [1st Dist.] 1998), the court held that the absence of a time limitation didn't render a noncompete unreasonable when it was part of a business sale. While that case represents the outer boundary, it illustrates that Texas courts recognize the seller's bargaining position and the buyer's legitimate need to protect what it purchased.

Scope, Geography, and Duration

Even in a sale-of-business context, the noncompete must be reasonable in three dimensions.

Scope defines the activities the seller is prohibited from performing. A reasonable scope restricts the seller from engaging in the same type of business that was sold, not from working in any capacity in any industry. If the seller sold a commercial HVAC company, the noncompete should restrict the seller from operating, owning, managing, or being employed by a commercial HVAC company, not from performing any construction-related work. Overly broad scope invites reformation by the court and, under § 15.51(c), may prevent the buyer from recovering damages for breach.

Geography defines where the restriction applies. A reasonable geographic restriction is tied to the territory where the sold business operated, had customers, or generated revenue. For a local service company, a 25-to-50-mile radius around the business's operating area may be reasonable. For a regional company, the restriction might cover multiple counties or states. For an e-commerce or SaaS business with no physical service territory, geographic restrictions are less useful, and the noncompete should instead restrict competition based on customer lists, market segments, or named competitors.

Duration defines how long the restriction lasts. In sale-of-business transactions, two to five years is the typical range. Two years is common for businesses where customer relationships turn over frequently. Three to five years is appropriate for businesses where the seller's personal relationships with customers are the primary source of value and would take several years for the buyer to replicate independently. Durations beyond five years are enforceable in Texas under the right circumstances but are harder to justify and invite closer judicial scrutiny.

The Blue Pencil Doctrine

If a noncompete is drafted too broadly, Texas law doesn't void it entirely. Under § 15.51, the court is required to reform the covenant to the extent necessary to make it reasonable and then enforce the reformed version. This is called the blue pencil (or reformation) doctrine.

Reformation protects the buyer from losing the noncompete entirely because it was drafted too aggressively. But it comes with a cost. Under § 15.51(c), if the primary purpose of the agreement is to obligate the promisor to render personal services, the buyer can't recover damages for breach of an unreasonable covenant. The buyer can get injunctive relief (a court order stopping the seller from competing), but the monetary remedy for the period before the injunction is issued may be lost.

Draft the noncompete as narrowly as possible to match the legitimate interest being protected. An overly broad noncompete is weaker, not stronger, because it invites reformation and may eliminate the damages remedy. A noncompete that's already reasonable is enforceable as written, including damages.

Non-Solicitation of Customers and Employees

In addition to a noncompete, most business sale agreements include separate non-solicitation covenants.

A customer non-solicitation covenant prohibits the seller from soliciting or doing business with the sold company's customers. It's narrower than a noncompete (the seller can work in the same industry as long as the seller doesn't target the sold company's specific customers) and is generally easier to enforce because it's more precisely tailored to the interest being protected.

An employee non-solicitation covenant prohibits the seller from recruiting or hiring the sold company's employees. If the seller built the team and has personal relationships with key employees, the seller could devastate the buyer's operations by recruiting those employees to a new venture. Non-solicitation covenants are governed by § 15.50 and must meet the same reasonableness requirements as noncompetes.

Both types of non-solicitation should specify whether they restrict only active solicitation (the seller can't approach the customer or employee but can accept business if the customer or employee approaches the seller independently) or all dealings (the seller can't do business with the customer or hire the employee regardless of who initiates contact).

Transition Services Agreements

In many acquisitions, particularly asset purchases, the buyer needs the seller's help operating the business after closing while the buyer gets up to speed. A transition services agreement (TSA) defines the services the seller will provide, for how long, and at what cost.

Common transition services include financial and accounting support (maintaining the books until the buyer's accounting team takes over), IT and systems administration (operating the company's technology infrastructure during migration), customer and vendor relationship management (introducing the buyer to key accounts and facilitating the handoff), human resources and payroll (continuing HR functions until the buyer establishes its own systems), and regulatory and licensing support (assisting with license transfers, permit applications, and regulatory filings).

TSA terms typically run three to 12 months, depending on the complexity of the transition. Compensation can be structured as a flat monthly fee, an hourly rate, or a reimbursement of the seller's actual costs plus an agreed margin. The TSA should specify service levels (what constitutes satisfactory performance), termination provisions (the buyer should be able to terminate individual services as it takes them in-house), and liability limitations (the seller shouldn't be liable for losses caused by the buyer's failure to hire replacement personnel or establish its own systems).

Consulting Agreements

A consulting agreement engages the seller as an independent contractor to provide advisory services after closing. Consulting agreements are common when the buyer values the seller's industry expertise, customer relationships, or operational knowledge and wants ongoing access beyond the structured transition period.

Consulting agreements should be coordinated with the noncompete. If the noncompete prohibits the seller from working in the industry and the consulting agreement requires the seller to perform industry-related advisory services, the two documents conflict. Carve out the consulting services from the noncompete so the seller can perform the work it's being paid to do.

Structure the consulting agreement as an independent contractor relationship, not employment. If the seller is treated as an employee (receiving a W-2, working set hours, using the buyer's equipment, taking direction from the buyer on how to perform the work), the IRS may reclassify the relationship as employment, which affects payroll tax obligations, benefits eligibility, and the tax treatment of the consulting fees.

Tax Treatment of Noncompete Payments

A portion of the purchase price is allocated to the noncompete agreement for tax purposes. Payments allocated to a noncompete are taxed as ordinary income to the seller (up to 37 percent federal) rather than capital gain (20 percent federal). Payments allocated to goodwill are capital gain.

Under IRC § 197, both goodwill and noncompete agreements are amortizable over 15 years, so the buyer's amortization deduction is the same regardless of allocation. But the seller's tax rate on the noncompete allocation is significantly higher. Sellers should negotiate the allocation carefully, pushing for a smaller noncompete allocation and a larger goodwill allocation to preserve capital gains treatment on a greater portion of the purchase price.

Typical noncompete allocations range from 10 to 25 percent of the purchase price for service businesses (where the seller's personal relationships are a significant component of value) and 5 to 15 percent for asset-heavy businesses (where physical assets drive value rather than personal goodwill).

Practical Recommendations

Draft the noncompete to match the business's footprint. Restrict the seller from competing in the same type of business, in the territory where the business operated, for a period that reflects how long the seller's relationships would remain valuable. Don't draft it broader than that. A narrower noncompete is easier to enforce and preserves the damages remedy under § 15.51(c).

Include separate customer and employee non-solicitation covenants. Non-solicitation is narrower than a noncompete and is often easier to enforce because it targets specific relationships rather than an entire industry.

Coordinate the noncompete, the consulting agreement, and the transition services agreement as a package. All three affect the seller's post-closing activities, and they should be drafted consistently so the seller can perform the services it's being paid to provide without violating the restrictions it's agreed to observe.

If the seller will be performing transition services, structure the TSA with defined services, defined timelines, and defined compensation. Don't leave it open-ended. A TSA that runs indefinitely without defined deliverables becomes a dispute over whether the seller is performing adequately and whether the buyer is paying fairly.

Negotiate the noncompete allocation in the purchase agreement. For sellers, minimizing the noncompete allocation preserves capital gains treatment. For buyers, the 15-year amortization under § 197 is the same for goodwill and noncompetes, so the allocation is neutral from the buyer's tax perspective and can be used as a negotiating concession.

Include carve-outs that protect the seller's ability to earn a living outside the restricted business. Passive investments (typically under 5 percent ownership in a competitor), unrelated business activities, teaching, writing, and charitable work are commonly carved out from sale-of-business noncompetes and don't threaten the goodwill the buyer purchased.