FTC Non-Compete Ban: What It Means for Business Acquisitions

The Federal Trade Commission's final rule banning non-compete agreements has significant implications for the labor market, but its impact on business acquisitions is more detailed than headlines suggest. The rule includes a critical carve-out that search fund entrepreneurs and business buyers need to understand.

The Business Sale Exception

The FTC rule specifically exempts non-compete agreements entered into in connection with the bona fide sale of a business. This means that when you acquire a company, the seller can still be bound by a non-compete agreement as part of the transaction. The exemption recognizes that these covenants protect the buyer's investment in goodwill - without them, a seller could sell a business and immediately set up a competing operation, destroying the value the buyer just paid for.

What Changed and What Didn't

No change for M&A: Non-compete clauses in acquisition agreements remain enforceable. If you're buying a business and the seller agrees not to compete for 3-5 years within a defined geographic area and scope, that agreement stands.

Changed for employees: The rule bans most new non-compete agreements with workers and voids existing ones for workers other than senior executives. This affects how the acquired company can restrict its employees post-closing.

Impact on employee retention post-acquisition: If the acquired business relied on employee non-competes to retain key talent, the new rule means those agreements may no longer be enforceable. Acquirers need alternative retention strategies: competitive compensation, equity incentives, retention bonuses, and positive culture.

Due Diligence Implications

Buyers should now specifically assess during due diligence:

• Which employees were subject to non-compete agreements and how critical they are to the business
• Whether the business's competitive position depends on employee non-competes rather than genuine competitive advantages (moats)
• The company's overall talent retention strategy beyond restrictive covenants
• State-level variations - some states had already banned or limited non-competes (California, Oklahoma, North Dakota)

Practical Advice for Searchers

For search fund entrepreneurs acquiring businesses: continue to include seller non-compete provisions in your purchase agreements - they remain valid and important. But reassess your approach to employee retention. In a world where employees can't be bound by non-competes, businesses that retain talent through positive culture, competitive compensation, and career development will be more valuable acquisitions than those that relied on restrictive covenants.