The Law Offices of Paul H. Appel – Your Trusted Business Law Partner in New Jersey
Mergers & Acquisitions · Restrictive Covenants
A buyer who pays for a business's reputation and customer base needs assurance the seller will not reopen down the road. A well-drafted seller covenant gives that assurance without overreaching.
Why sellers sign them
When someone sells a business, much of the price is often for goodwill — the expectation that customers will keep coming. If the seller could immediately compete for those customers, the buyer would have paid for something the seller could take back.
That is why a covenant not to compete is a standard part of almost every small-business sale, and why it is treated differently from the non-compete an employer asks an employee to sign. The seller is usually an owner with bargaining power, receiving substantial payment, and giving up the right to compete in exchange for it.
This page covers covenants given by sellers as part of a sale. For non-competes and non-solicits in ordinary employment and contractor relationships, see the firm's page on non-compete agreements in New Jersey.
Enforceability always depends on the specific terms and facts. The points below describe general New Jersey principles, not a prediction about any particular covenant.
How courts see them
New Jersey has no general non-compete statute. Courts apply a reasonableness test — whether the restriction protects a legitimate interest, imposes no undue hardship and does not injure the public — and may narrow ("blue-pencil") an overbroad covenant rather than strike it.
| Factor | Seller in a business sale | Employee |
|---|---|---|
| Interest protected | Goodwill the buyer purchased | Customer relationships, confidential information |
| Bargaining position | Usually negotiated between owners, often with counsel | Often presented as a condition of a job |
| Consideration | Part of a substantial purchase price | Employment or continued employment |
| Typical judicial approach | Generally enforced more readily, if reasonable | Scrutinized more closely for hardship and scope |
Legislation to limit non-competes has been proposed repeatedly in New Jersey, and federal policy has shifted in recent years. Current law should be checked when a covenant is drafted.
Drafting the covenant
Activity
Tie the restricted activity to the business actually sold. A covenant against "any business" invites a court to cut it back; one against operating, owning or working for a competing HVAC service company is easier to defend.
Territory
Match the geography to where the business really draws customers — a county, a radius from each location, or named service areas. A shore-town retailer and a regional distributor justify very different maps.
Duration
Seller covenants commonly run longer than employee covenants because goodwill takes time to transfer, but the length should still bear a relationship to the business and the price. There is no single safe number.
Solicitation
A non-solicitation clause covering customers and staff often matters more in practice than the non-compete itself, and is easier to enforce. Most deals include both.
Remedies
Consent to injunctive relief, extension of the period during any breach, and the relationship to indemnity or offset against a seller note should be spelled out.
Who signs
A covenant signed only by the selling company protects very little; the company is usually an empty shell after an asset sale. The individuals who own and run it should sign personally. Depending on the business, that may include every selling shareholder or member, a spouse or family member active in the business, and any affiliated entity that could compete.
Minority owners who receive only a small share of the proceeds raise a fairness question: a broad covenant may look less reasonable for someone with a small stake. Owners who will stay on as employees of the buyer may sign both a sale-of-business covenant and a separate employment covenant, and the two should be drafted to work together. The interplay with employment terms is covered on the acquisition employment agreements page.
Price and tax
Purchase agreements usually allocate the price among assets, goodwill and the non-compete. The allocation matters for tax: amounts allocated to a covenant can be taxed differently to the seller than amounts allocated to goodwill, and the buyer's recovery of that cost may follow different rules. Buyers and sellers therefore often have opposing preferences.
Your CPA should advise on the allocation before it is fixed, and both parties should report it consistently. The legal concern is making sure the covenant is supported by real consideration and that the allocation in the agreement matches what the accountants have agreed.
Before signing
The covenant is one of several protections negotiated in the purchase agreement; the others are explained on the buyer protections page, and the overall deal on the business purchase and sale hub.
Questions & answers
Generally they are enforced more readily than employee non-competes, because they protect goodwill the buyer paid for and are negotiated between owners. They still must be reasonable in activity, territory and duration. A court that finds a covenant too broad may narrow it rather than throw it out, but drafting it reasonably in the first place is far safer.
There is no fixed limit. Seller covenants are often longer than employee covenants because transferring goodwill takes time, but the period must be justified by the nature of the business and the price paid. A covenant much longer than the buyer needs to establish itself with the customers increases the risk a court will shorten it.
Every person and entity able to compete in a way that would harm the goodwill: the selling company, each selling owner personally, and often family members or affiliates active in the business. If a key person is not bound, the covenant can be undermined by that person opening the competing business instead.
Usually the agreement allocates some value to it, which supports the covenant and has tax consequences for both sides. How much to allocate is a negotiated point that should be decided with input from each party's accountant, and the allocation should be reported consistently by buyer and seller.
Your attorney
Every matter at the firm is handled personally by Paul — the same attorney reads the documents, gives the advice and negotiates on your behalf.
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