A founder I represented in 2024 sold his software business to a strategic buyer and signed a five-year non-compete that, on its face, prohibited him from competing anywhere in North America in any business “engaged in the development, marketing, or sale of software for the construction industry.” Eighteen months later, the FTC’s national non-compete ban dropped, then was enjoined in part by a federal district court, then was partially upheld on appeal, then was renegotiated by the new administration into a narrower rule that took effect in 2025. The founder’s non-compete sat through all of it. The founder called me from his office at the new venture he had started — also software, also construction-adjacent, also North American — and asked whether he should be worried.
The answer was complicated and depended on facts the merger agreement did not directly address. The state of governing law on the non-compete mattered. The state where the founder was actually working at the new venture mattered, separately from the governing-law state. The portion of the purchase price specifically allocated to the non-compete mattered. The five-year duration mattered. The “engaged in” language — which was broad enough to capture any business that touched the construction-software market, not just direct competitors — mattered. The FTC rule mattered. The state-court precedent on enforceability mattered. By the time we worked through it, the non-compete that had looked airtight at closing turned out to be partially enforceable, partially unenforceable, and partially the subject of an emergency motion before a state court that had to decide which body of law applied to which question.
The M&A seller non-compete in 2026 is no longer a paragraph the founder can sign without reading. The legal environment around it has shifted in three directions at once, and the standard-form clause that worked in 2018 is not the clause the founder should be signing today.
The FTC rule and its M&A carve-out
The Federal Trade Commission’s non-compete rule that emerged in its final 2025 form prohibits most employer-employee non-competes nationally. The rule contains a specific carve-out for non-competes entered into “in connection with the bona fide sale of a business” — meaning the rule does not prohibit M&A seller non-competes per se. The seller non-compete is exempted from the federal prohibition.
What the rule does, however, is reframe the legal posture of the M&A seller non-compete in two consequential ways. First, the federal exemption is not unconditional — it requires the non-compete to be “in connection with the bona fide sale of a business,” which the FTC has taken in subsequent guidance to mean that the founder must be selling a meaningful ownership interest, not a token stake, and the non-compete must be tied to the sale rather than to a separate employment relationship that happens to coincide with the sale. The rule’s gloss on “bona fide sale” tightens what historically was an assumed exemption.
Second, the federal rule’s existence has changed how state courts approach the underlying enforceability question. State courts that previously treated M&A seller non-competes as broadly enforceable now operate against a federal backdrop that treats employer-employee non-competes as presumptively void. The cultural shift in the case law has been subtle but real — courts that used to enforce the seller non-compete reflexively now look more closely at whether the restriction is truly tied to a sale (rather than an employment relationship dressed up as one), and whether the scope is justified by the goodwill being protected.
The state patchwork is bigger than it was
California has long voided most non-competes, including in the M&A context to the extent the restriction reaches beyond the goodwill transferred in the sale. Florida has long enforced reasonable M&A non-competes through Section 542.335 of the Florida Statutes, with the 2025 CHOICE Act adding some additional latitude for high-earner employee non-competes that does not directly bear on the M&A seller context. Texas, Massachusetts, Illinois, Colorado, and Washington have each layered restrictions on employee non-competes that, while not directly applicable to M&A sellers, have produced state-court holdings narrowing the enforceability of seller non-competes that look more like employment restrictions than sale-tied protections.
The result is that the state of governing law in the merger agreement has become consequential in a way it was not five years ago. Delaware law, which has historically been the default and which enforces reasonable M&A non-competes, remains a sound choice from the founder’s perspective only if the founder is actually in Delaware or in a state with similar enforcement. If the founder is in California, a Delaware-law non-compete may be unenforceable as a matter of California public policy regardless of the choice-of-law clause. If the founder is in a state with intermediate restrictions, the analysis turns on the specifics — and the specifics are not the kind of thing the seller’s counsel should be discovering in the middle of a post-closing dispute.
The drafting fix is to think about the choice-of-law clause as a deliberate enforceability question rather than as a default. A founder who will be physically located in California post-closing and who wants the non-compete to be enforceable should be considering whether Delaware law is actually selected, whether the agreement contains the necessary nexus to Delaware to make the choice stick, and whether a fallback severance clause covers the case where a court strips the non-compete down to a smaller geographic scope or shorter duration.
The purchase-price allocation is the secret enforcement lever
The portion of the purchase price that is specifically allocated to the non-compete is one of the most important and least-negotiated provisions in the merger agreement from the enforceability perspective. Courts asked to enforce a non-compete look, among other things, at the consideration the seller received for the restriction. A non-compete that is wrapped into the general purchase price with no specific allocation gets harder to enforce, because the court cannot identify what the seller was actually paid for the restriction. A non-compete that is specifically allocated — say, five percent of the purchase price, paid in cash at closing, with the receipt acknowledged as consideration specifically for the non-compete — is easier to enforce because the consideration is identifiable and the founder cannot credibly argue that the restriction was uncompensated.
The allocation cuts the other way for tax purposes. The buyer wants to allocate as much of the purchase price as possible to the non-compete (and to other amortizable intangibles), because the allocation accelerates the buyer’s tax deductions. The seller wants to allocate as little as possible, because non-compete consideration is taxed as ordinary income at the seller level rather than as capital gain. The negotiated allocation is a compromise that often does not optimize for either tax efficiency or enforceability. The founder’s counsel should recognize that the allocation has enforcement consequences and should be part of the conversation about how much to allocate and how to characterize the allocation in the document.
I have seen non-compete enforcement actions where the allocated consideration was the dispositive fact at the preliminary-injunction hearing. A buyer trying to enforce a non-compete with $50,000 of allocated consideration in a $40 million deal will get a different reception than a buyer trying to enforce a non-compete with $2 million of allocated consideration in the same deal. The founder, at closing, often does not realize that the buyer’s allocation request — sometimes presented as a tax-mechanics issue — is also an enforcement-leverage issue, and that fighting the allocation down does not just save tax dollars but also weakens the enforceability of the restriction the founder is signing.
What the standard clause gets wrong in 2026
The standard M&A non-compete clause from the form books has three problems for the 2026 founder. The first is duration. A five-year non-compete that was the market standard ten years ago is increasingly being trimmed by courts to two or three years post-closing, and the long-tail enforcement risk for the buyer of a five-year clause is now real. Founders should be pushing for three years with explicit step-down provisions (e.g., narrower scope in years two and three) rather than five years with a blanket scope.
The second is the geographic and business scope. “Anywhere in the United States” and “any business engaged in [broad industry category]” are increasingly being narrowed by courts to a more proportionate scope. The buyer’s first draft will reach for the broadest possible scope on the theory that the buyer can always concede narrower at enforcement. The court that strikes down an overbroad clause may not blue-pencil it down — it may strike the entire clause. Founders should push for narrower drafting at signing rather than gamble on judicial blue-penciling.
The third is the non-solicit. The standard form bundles non-compete and non-solicit together, often with identical scope. The non-solicit (employees, customers) is generally enforceable under standards that are more relaxed than the non-compete standard, and the founder is better served by having the two restrictions drafted as separate clauses with separately negotiated scope. A founder who can live with a meaningful non-solicit but who needs to be able to work in the industry should not be forced into an all-or-nothing scope by lazy drafting.
The conversation founders should have before signing
The non-compete is one of the half-dozen most consequential provisions in an M&A deal for a founder who plans to continue working in the industry. It is also one of the provisions most prone to being treated as boilerplate. The 2026 legal environment — federal rule, state patchwork, allocation interaction with tax and enforcement — has made the standard form clause more brittle than it used to be, and a founder signing a 2018-era non-compete in a 2026 deal is taking on both legal risk (the clause may not work the way the founder thinks it will) and personal risk (the clause may bind the founder more tightly than the founder realized in places the founder did not expect).
The founder’s negotiation priorities, in rough order: tighter duration with step-down, narrower scope tied to the actual business being sold, deliberate choice-of-law selection aligned with the founder’s post-closing location, separate drafting of non-compete and non-solicit, and a specific allocation of purchase price that the founder is comfortable with from both a tax and an enforcement perspective. Each of these is negotiable. The buyer’s counsel will push back on each one. The founder’s counsel who has not thought about them before drafting the term sheet will not get them. Founder-side M&A representation on restrictive covenants is a separate workstream from the rest of the deal, and the founders who fare best post-closing are the ones whose counsel treated it that way at the term-sheet stage.
If you are a founder approaching a sale and trying to figure out what your non-compete should actually look like in the 2026 legal environment, feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
— John
