Seller Non-Competes in California: Enforcing Section 16601 After You Buy a Business

Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).

Business and Professions Code section 16601 is the California exception that lets a business seller agree not to compete with the buyer. A non-compete in a purchase agreement is generally enforceable if the seller sold the business's goodwill, or all of an ownership interest in a sale that included goodwill. The restraint must cover a specified area where the business was carried on. It lasts only while the buyer carries on a like business there. Kolmogorov Law, P.C., a business litigation firm in Irvine, represents buyers and sellers in these disputes.

Call (909) 235-6116 or contact us online to discuss a seller who is competing after a sale, or a restriction you have been asked to honor.

What section 16601 allows

The starting point runs the other way. Every contract that restrains anyone from engaging in a lawful profession, trade, or business is void to that extent, except as the same chapter provides. (Bus. & Prof. Code, § 16600, subd. (a).) Our guide to California non-compete law covers that rule.

Section 16601 is one of the exceptions. It reaches three kinds of sellers:

• A person who sells the goodwill of a business.
• An owner of a business entity who sells or otherwise disposes of all of his or her ownership interest.
• An owner of an entity that sells all or substantially all of its operating assets together with its goodwill, does the same with a division or subsidiary, or sells all of the ownership interest of a subsidiary.

Any of them may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business sold has been carried on. The agreement holds so long as the buyer, or anyone deriving title to the goodwill or ownership interest from the buyer, carries on a like business there. (Bus. & Prof. Code, § 16601.)

The reason for the exception is the price. A buyer pays for goodwill, meaning the expectation that customers will keep coming. The Court of Appeal has explained that the exception exists to prevent the seller from depriving the buyer of the full value of what it bought. (Alliant Ins. Services, Inc. v. Gaddy (2008) 159 Cal.App.4th 1292.)

The limits on a seller non-compete

Each limit comes from the words of the statute.

Geography. The area must be one where the sold business was carried on. In the decision just cited, the court said the area is not limited to the locations of the company's buildings or to where it made sales. It extends to the entire area in which the business conducted all phases of its operations, including promotion and marketing. The court upheld a statewide restriction on that record.

Subject. The restraint is on a similar business. A clause that bars the seller from unrelated lines the buyer happens to run is outside the exception.

Duration. The statute sets no number of years. It ties the restraint to the period the buyer or its successor carries on a like business in the area.

Non-solicitation. A related clause may bar the seller from soliciting customers and employees. The Court of Appeal has held such a clause enforceable only as to the customers and employees of the business that was sold, not the buyer's other customers and staff. The court refused to narrow an overbroad clause for the buyer and reversed the injunction. (Strategix, Ltd. v. Infocrossing West, Inc. (2006) 142 Cal.App.4th 1068.)

The same decision noted that courts have trimmed overbroad or missing territory and time terms, but will not strike a new bargain to save an invalid covenant.

Restrictions that fall outside the exception

Three situations fall outside it.

The person restrained sold no goodwill. A relative or associate who held no ownership interest is not within the statute, whatever the closing documents say. Selling shares is not always enough either. The Court of Appeal has held that a sale of all of an owner's shares supports a non-compete only if the transaction shows the parties valued or considered goodwill as part of the price. A 7 percent shareholder bought out at book value was not bound.

The restraint is a second one tied to the seller's later job with the buyer. The Court of Appeal has refused to enforce a non-compete in a selling shareholder's employment agreement that ran for a year after the employment ended. The covenant in the purchase agreement was valid. The additional, broader one was not. The court agreed that a sale covenant does not fail only because of the document it appears in.

The restraint protects the wrong goodwill. A covenant measured by the buyer's whole footprint, not the sold business's, goes further than section 16601 permits.

How the dispute comes up

The buyer of a neighborhood service business learns that the seller has opened a new shop two miles away under a relative's name.

The seller of a distribution company takes a consulting role with a rival, and the rival begins quoting the buyer's largest accounts.

In each case the questions are the same. Is the person bound? Is the activity a similar business inside the specified area? Is the buyer still operating there?

Enforcing the non-compete as the buyer

Gather proof before you send a letter. Business filings, signage, online listings, customer statements, and phone records show who is operating and where.

Move quickly if customers are leaving. A court may grant a preliminary injunction before judgment, on notice to the other side. (Code Civ. Proc., § 527, subd. (a).) A final injunction may be granted where money would not afford adequate relief or the amount would be extremely difficult to ascertain. (Civ. Code, § 3422.) Our page on TROs and preliminary injunctions explains the showing required.

Damages are available as well, measured by the detriment the breach caused. (Civ. Code, § 3300.) Our page on lost profits covers the proof.

If you still owe the seller a note or an earnout, read the setoff terms before withholding anything. Our page on purchase agreement disputes covers those claims.

If you are the seller bound by one

Read what you signed against the statute. Identify the business that was sold, the territory named, and the term. A restriction within those bounds can be enforced, and a court can stop the activity before trial.

Check whether the buyer is still in the business. The statute's protection lasts only while the buyer or its successor carries on a like business in the area.

If the restriction reaches past the sold business, in territory or in subject, raise that before you act, not after.

What to bring to the first meeting

• The purchase agreement and every related contract: non-compete, employment or consulting agreement, note, and security agreement.
• Evidence of where the sold business operated and marketed before the sale.
• Evidence of the competing activity, with dates.
• Customer and revenue data for the periods before and after it began.

Frequently asked questions

I bought a business and the seller opened a competing shop two miles away. Is the non-compete in our purchase agreement enforceable in California?

Generally, yes. California Business and Professions Code section 16601 allows a seller of goodwill, or of an entire ownership interest, to agree not to carry on a similar business in a specified area where the sold business operated. A shop two miles away is covered if it sits inside the agreement's territory and the sold business operated there. You may ask a court for an injunction and for damages.

The buyer of my company says I cannot work in the industry anywhere in the country for five years. Is that valid?

Only to the extent the statute allows. California permits a seller's non-compete within a specified geographic area where the sold business was carried on, for as long as the buyer carries on a like business there. A nationwide restraint on a business that operated in one region is open to challenge beyond that region.

How long can a non-compete last after the sale of a business in California?

Section 16601 sets no fixed number of years. It permits the restraint so long as the buyer, or a successor to the goodwill, carries on a like business in the specified area. If the purchase agreement states a term of years, that term applies as well.

Can the buyer stop the seller from soliciting customers?

Yes, within limits. California's Court of Appeal has held that a seller's non-solicitation covenant may be enforced as to the customers and employees of the business that was sold. A clause that also covers the buyer's other customers and employees goes beyond section 16601, and the court declined to rewrite it.

What can a buyer recover if the seller violates the non-compete?

A California court can enjoin the competing activity and award damages for the loss the breach caused, such as the profit on diverted customers. The purchase agreement may add remedies such as attorney fees. A buyer that owes the seller deferred payments should read the agreement's setoff terms before withholding them.

Talk to a California breach of contract attorney

If a seller is competing with the business you bought, or a buyer is enforcing a restriction against you, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located in Irvine, California. Related reading: our breach of contract practice page, our guide to buying or selling a small business, and our page on partner and LLC member non-competes.

This page provides general information about California law and is not legal advice. Outcomes depend on the purchase agreement, the facts of the sale, and the court.