Are non-compete agreements more enforceable in business sales than in employment?

Yes. Mississippi courts apply a more relaxed standard in the business sale context, recognizing that the parties are sophisticated, the seller received substantial consideration, and the restrictions protect the buyers legitimate investment in goodwill. Courts are significantly more deferential to the agreed terms.

How is a non-compete agreement taxed in a business sale?

Amounts allocated to a covenant not to compete are ordinary income to the seller and amortizable by the buyer over 15 years under Section 197. This creates competing tax interests that must be negotiated as part of the purchase price allocation in the acquisition agreement.

Restrictive Covenants in Mississippi Business Sales: Non-Competes, Non-Solicits, and Confidentiality | Lynch Law

When a business is sold in Mississippi, the purchase agreement almost always includes restrictive covenants—non-compete agreements, non-solicitation agreements, and confidentiality provisions—designed to protect the buyer's investment in the goodwill of the business. Mississippi courts have historically been more willing to enforce restrictive covenants in the context of a business sale than in the employment context, recognizing that the buyer has paid valuable consideration for the goodwill and customer relationships that the covenants protect.

The Heightened Enforceability Standard

Mississippi courts apply a more relaxed standard when evaluating restrictive covenants in business sale agreements compared to employment agreements. The rationale is that the seller and buyer in a business transaction are sophisticated parties negotiating at arm's length, the seller has received substantial consideration (the purchase price) for agreeing to the restrictions, and the restrictions protect the legitimate business interest of the buyer who has paid for the goodwill.^[1]

In the employment context, Mississippi courts require that non-compete agreements be reasonable in scope, duration, and geographic area, and courts have been willing to invalidate overly broad restrictions. In the business sale context, however, courts are significantly more deferential to the terms agreed upon by the parties and are less likely to second-guess the reasonableness of the restrictions.

Non-Compete Agreements

A non-compete agreement in a business sale prohibits the seller from engaging in a competing business for a specified period within a defined geographic area. The duration and geographic scope should be tailored to the specific business being sold. For a local service business, a geographic restriction covering the relevant market area (the county or metropolitan area) for three to five years is typically reasonable. For a business with a broader market reach, the geographic restriction and duration may be correspondingly larger.^[2]

Non-Solicitation Agreements

Non-solicitation provisions protect the buyer against the seller's use of pre-existing relationships to divert customers, employees, or suppliers away from the purchased business. These provisions are typically less controversial than outright non-compete restrictions because they target specific conduct (soliciting known contacts) rather than broadly prohibiting all competitive activity. A well-drafted non-solicitation agreement should separately address customer non-solicitation, employee non-solicitation, and supplier non-solicitation.^[3]

Confidentiality Provisions

Confidentiality provisions protect the buyer's access to the proprietary information of the business—customer lists, pricing strategies, trade secrets, and other confidential business information. Unlike non-compete and non-solicitation provisions, which are limited in duration, confidentiality provisions for true trade secrets may be perpetual. The confidentiality provision should clearly define what constitutes confidential information and include appropriate exceptions for information that becomes publicly available or that the seller already knew independently.^[4]

Tax Treatment

The allocation of purchase price to a non-compete agreement has significant tax consequences. Amounts allocated to a covenant not to compete are amortizable by the buyer over 15 years as a Section 197 intangible. For the seller, the amount allocated to the non-compete is ordinary income—not capital gain. This creates competing interests: the buyer prefers a larger allocation to the non-compete (for the amortization deduction), while the seller prefers a smaller allocation (to preserve capital gain treatment on the goodwill). The allocation must be negotiated and documented in the purchase agreement, and both parties are generally bound by the agreed allocation. Consulting with experienced business transaction counsel ensures that restrictive covenants are properly drafted and the tax consequences are understood.^[5]

References

^[1] See Frierson v. Sheppard Bldg. Supply Co., 154 So. 2d 151 (Miss. 1963) (Mississippi courts apply heightened enforceability standard to restrictive covenants in business sale context).
^[2] Duration and geographic scope of non-compete agreements in business sales should be tailored to the specific business; courts in the business sale context are more deferential to the agreed terms than in the employment context.
^[3] Non-solicitation provisions should separately address customers, employees, and suppliers to provide comprehensive protection for the buyer's investment in business relationships.
^[4] Miss. Code Ann. § 75-26-1 et seq. (Mississippi Uniform Trade Secrets Act); confidentiality provisions for trade secrets may be perpetual.
^[5] IRC § 197 (amortization of covenant not to compete as 15-year intangible); § 1060 (purchase price allocation in applicable asset acquisitions); see Business & Corporate Law.