The FTC’s non-compete ban made headlines the moment it dropped. And within about 48 hours, every buyer we were working with had the same question: does this change how acquisition deals get structured?
Short answer: a federal court blocked the rule before it took effect. But the longer answer matters more, especially if you are buying a business right now using SBA 7(a) financing. You need to understand what actually governs non-competes in a sale, what is genuinely at risk, and how to protect your acquisition regardless of where federal policy ends up.
The FTC Non-Compete Rule: What Actually Happened
In April 2024, the Federal Trade Commission issued a final rule that would have banned most non-compete agreements nationwide. The rule was set to take effect in September 2024.
It never did.
A federal district court in Texas vacated the rule in August 2024, finding the FTC had exceeded its statutory authority. The ruling applied nationally. The FTC appealed, but as of now, the ban is not in effect.
What this means practically: the FTC non-compete ban is not the law. The status of non-competes in business sales currently depends on state law, the terms in your purchase agreement, and how your deal is structured.
That does not mean you can ignore the issue. The underlying legal pressure is real, the policy debate is ongoing, and some states have moved independently to restrict non-competes regardless of what the FTC does.
Why Non-Competes in Business Sales Are Different
Here is something most buyers miss when they read about non-compete legislation: there is a fundamental legal distinction between employment non-competes and non-competes tied to a business sale. These are not the same animal.
The FTC’s proposed rule explicitly carved out a different standard for non-competes connected to the sale of a business. Under the rule as written, a non-compete agreement could remain enforceable if the restricted person owned at least 25% of the business being sold.
That carve-out exists for a reason courts and regulators have recognized for decades.
When you buy a business, you are paying for goodwill. The seller’s relationships, reputation, and customer base are embedded in that purchase price. If the seller can walk out the door on day one and rebuild the same business down the street, you have not actually bought what you paid for. You paid for air.
Courts in most states get this. Non-competes tied to a business sale are typically held to a more permissive standard than employment non-competes. Broader scope, longer duration, and wider geographic coverage are all more likely to be enforced. That is true in Texas, Florida, and most states where we see SBA-financed deals close regularly.
What a Seller Non-Compete Should Actually Cover
If you are acquiring a business with SBA 7(a) financing, the lender will require a seller non-compete as part of the deal. Not optional. SBA guidelines mandate it.
But not all non-compete clauses are created equal. A weak one can leave you exposed in exactly the scenario you were trying to prevent.
Here is what a properly structured seller non-compete should address:
Duration. Two to five years is typical for an SBA-financed business sale. Five years is more protective and generally enforceable in the context of a business acquisition. We push for five on most deals.
Geographic scope. Match the actual market the business serves. A local plumbing company with customers in a 30-mile radius needs a 30-mile restriction. A software company with national clients needs national scope. Misalignment here is one of the most common drafting mistakes we see.
Scope of activity. Be specific. “Cannot engage in the same or similar business” is too vague in some jurisdictions. Name the industry, the services, and the customer types. The more precise, the more defensible.
Who is restricted. The seller, obviously. But also the seller’s immediate family members who participated in the business, and any entities the seller controls.
We have seen situations where a seller signs the non-compete personally while their spouse or a separate LLC opens a competing shop the next month. Do not let that gap exist in your agreement.
Non-solicitation. This is separate from the non-compete but equally important. The seller should be restricted from soliciting existing customers, employees, and suppliers for the same duration as the non-compete.
How SBA Lenders Think About Seller Non-Competes
When we submit a deal package to an SBA lender, the non-compete gets reviewed as part of underwriting. Lenders want to see that the seller is genuinely restricted from re-entering the market.
The concern is straightforward. If the seller can compete immediately after closing, the business cash flow that the lender is relying on for debt service could evaporate. Consider a $2M acquisition with a $1.6M SBA loan (with the remaining balance covered by a combination of equity injection, a seller note on full standby, and working capital reserves). That deal might underwrite at 1.5x DSCR, which already leaves limited margin. Now imagine the seller opens a competing operation six months post-close and takes 30% of revenue with them. The math falls apart fast.
This is not hypothetical. We have seen it happen on deals that closed without adequate non-compete protection.
SBA Standard Operating Procedures (found on SBA.gov) require that sellers who own at least 20% of the business being sold sign a non-compete as a condition of loan approval. The terms must be commercially reasonable and consistent with the protections a lender needs to feel comfortable with the cash flow assumptions in the underwriting.
If a seller refuses to sign a non-compete, that is a red flag worth taking seriously. It either signals they plan to compete, or they have an attorney who has coached them to resist. Either way, it tells you something about the negotiation ahead.
State Law Still Governs Enforcement
All of that matters. But here is the part that determines whether your non-compete actually holds up in court.
Because the FTC rule was vacated, where you buy matters. Non-compete law is a patchwork across states, and some states are significantly more restrictive than others.
California is the most well-known example. California generally prohibits non-compete agreements, including those in business sales, with very narrow exceptions. If you are buying a California business and the seller lives in California, you have a real enforcement problem.
Minnesota, North Dakota, and Oklahoma have similarly restrictive regimes. Several other states (including Illinois, Colorado, and Washington) have passed legislation in recent years that significantly narrows the scope of enforceable non-competes, even in the business sale context.
Before you close, your attorney should review the non-compete clause under the laws of the state where the business operates and where the seller resides. If those two states differ, you need an analysis of both. This comes up more often than you would think, especially with remote-friendly businesses or sellers who relocate around the time of a sale.
This is not something to leave to a boilerplate asset purchase agreement pulled off the internet. The non-compete is one of the most litigated provisions in business sale documents. Get it right at the drafting stage.
What to Do If the Seller Pushes Back
Sellers sometimes resist non-compete clauses. Here is how the common objections typically go:
“I’m retiring anyway, so it doesn’t matter.” It matters to the lender, and it matters if plans change. Retirement plans are not binding contracts.
“My attorney says the non-compete won’t be enforceable.” Maybe. But the deterrent value of a signed agreement still exists, and enforceability depends on jurisdiction and drafting quality, not the seller’s attorney’s opinion at the negotiating table.
“I’ll sign but only for one year in a narrow geography.” This is a negotiating position, not a final answer. Counter with your rationale: you are paying for goodwill that requires meaningful protection to retain value.
When sellers push back on non-competes, we treat it the same as pushback on seller note terms. It tells us something about the deal. Is the seller planning to compete? Do they not actually believe the business has durable value? Are they testing how hard we will push back?
The answer is: we push back. The non-compete is not a throwaway provision. It is a core part of what you are buying.
The FTC Issue Is Not Going Away
Even though the rule was vacated, the pressure on non-compete agreements is real and unlikely to disappear.
The FTC can refile the rule with a narrower scope. Congress could pass legislation. State-level restrictions will continue to expand.
Hard to say exactly how the regulatory environment shakes out over the next few years, but the direction is toward more scrutiny, not less.
For buyers using SBA 7(a) financing, the practical implication is this: structure your FTC non-compete ban business sale protections now as if they will be tested. Draft tightly. Restrict the right people. Match the geographic and subject matter scope to what the business actually does. And get it reviewed by an attorney in the relevant jurisdiction.
The FTC non-compete ban may not be law today. But the businesses you acquire are long-term investments, and the legal environment three or four years from now may look different than it does today.
A well-drafted non-compete that is enforceable under current law is worth the extra attention in due diligence. A weak one that gets invalidated mid-holdback period is a problem nobody wants to deal with.
Frequently Asked Questions
Does the FTC non-compete ban apply to business sales?
No, and the rule is not currently in effect. A federal court vacated the FTC non-compete rule in August 2024 before it could take effect. Even as proposed, the rule included a carve-out allowing non-competes in business sales where the restricted person owned at least 25% of the business being sold. Non-compete enforceability in acquisitions currently depends on state law and deal structure.
Are seller non-competes required for SBA 7(a) loans?
Yes. SBA guidelines require that sellers with 20% or more ownership sign a non-compete as a condition of loan approval. Lenders need this protection because the business cash flow used to calculate debt service coverage depends on the seller not immediately re-entering the market and taking customers. Without a non-compete, most SBA lenders will not approve the deal.
How long should a seller non-compete last in a business acquisition?
Two to five years is the standard range for an SBA-financed business sale. We typically push for five years when the seller’s relationships and customer base are central to the business value. Duration should be matched to the realistic time it takes for a buyer to establish independent relationships with customers and suppliers.
Can a seller’s non-compete be unenforceable even if they signed it?
Yes. Enforceability depends on state law, the scope of the restriction, and the specifics of how the agreement is drafted. California, for example, generally prohibits non-competes even in business sale contexts. Overly broad geographic scope or an unreasonable duration can also make a court reluctant to enforce. Have an attorney review the clause under the laws of the relevant jurisdiction before closing.
What happens to a seller non-compete if the FTC ban eventually passes?
Even if a future version of the FTC rule passes and survives legal challenge, prior non-compete agreements signed as part of a bona fide business sale are likely to receive different treatment than employment non-competes. Most proposed versions of the rule have included a business sale carve-out. That said, the legal environment is evolving. Structure your non-compete carefully now and consult your attorney if the regulatory environment changes before your holdback period expires.
Buying a Business and Want the Structure Done Right?
Non-competes are one piece of a deal structure that has to work together. The seller note, the equity injection, working capital reserves, the SBA underwriting, the purchase price allocation, and the non-compete all interact. Get one wrong and the others can unravel.
Regalis Capital runs a done-for-you acquisition advisory service. We find deals, negotiate terms, manage SBA lender relationships, and make sure the legal structure of each acquisition actually protects what you paid for.
If you are serious about acquiring a business and want a team that has closed over $200M in deals, start here.