Published by Chipman Glasser on September 29, 2025

When business partners part ways, the fallout isn’t just emotional—it can also be financially and legally messy. Disputes over money, clients, and future plans often flare up, and few issues spark more conflict than non-compete agreements. These seemingly small contractual clauses can end up shaping what each partner is allowed to do once the business relationship ends.

So, what exactly is a non-compete agreement? How does it apply when partners split? And how can it protect—or hurt—you? Let’s break it down.

What is a Non-Compete Agreement?

A non-compete agreement (NCA) is a contract in which one party agrees not to compete with another in a similar line of business for a specific period and within a defined geographic area. The purpose? To protect legitimate business interests like:

• Goodwill – the reputation and customer loyalty the business has built
• Client relationships – key business assets
• Trade secrets & proprietary knowledge – confidential strategies, pricing, or operational know-how

NCAs are used in every industry, across all kinds of businesses, for both business and employment relationships.

Whether it’s an employment relationship, business partnership, or joint venture, NCAs are often signed at the outset, sometimes embedded in corporate governance documents or partnership agreements, and sometimes as standalone contracts. Courts, however, won’t enforce them blindly. NCAs must be:

• Reasonable in time, scope, and geography
• Necessary to protect legitimate business interests
• Supported by consideration (something of value in exchange)
• Compliant with state law

NCAs can vary in the standard applied to limit their scope based on the particular laws of the state to which they are subject. For example, in BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (1999), the New York Court of Appeals emphasized that, in New York, an NCA must be “no greater than is required” to protect legitimate interests under a fact-specific approach. In Colorado, the standard largely tracks New York. For example, Reed Mill & Lumber Co. v. Jensen, 165 P.3d 733 (Colo. App. 2006) is instructive. In Reed Mill, the Colorado Court of Appeals explained that a covenant not to compete ancillary to the sale of a business is enforceable only to the extent it is reasonable and no greater than necessary to protect the buyer’s purchased goodwill—a fact-focused inquiry—and held that restraints which exceed what is required to protect that legitimate interest will be held unreasonable and invalid. By contrast, California takes an even stricter approach and largely bans non-competes under California Business & Professions Code § 16600 in favor of open competition and worker mobility.

Some states, including New York and Colorado, as well as Florida, favor enforcement only if NCAs are narrowly tailored. Other states, like California, make them nearly impossible to enforce.

Why Non-Competes Matter in a Business Divorce

When co-founders split, each often wants to start fresh—sometimes in the same industry. Without a non-compete, a departing partner could:

1. 1. • Launch a rival company the next day.
      • Take clients or employees.
      • Leverage confidential business knowledge against the former company.

That’s why many businesses use NCAs during a breakup. They help:

1. 1. • Retain clients by preventing poaching from departing partners.
      • Safeguard trade secrets by blocking insider knowledge from leaking to competitors.
      • Preserve brand value by safeguarding the business’ reputation and market share post-divorce.

When are Non-Competes Enforceable?

Enforceability varies widely by jurisdiction, but courts typically look at four factors:

1. 1. 1. 1. Reasonableness: Is the agreement or a particular restriction too broad in time, geography, or activity?
         2. Legitimate Interest: Does the agreement or a particular restriction protect trade secrets, clients, or goodwill?
         3. Consideration: Was the departing partner compensated for agreeing?
         4. Public Policy: Does it unfairly restrict competition or harm consumers?

Some states, including New York and Colorado as discussed above, as well as Florida (Fla. Stat. § 542.335), favor enforcement only if NCAs are narrowly tailored. Other states, like California, make them nearly impossible to enforce.

Key Considerations When Drafting a Non-Compete in a Business Divorce

If you’re drafting or negotiating an NCA during a business split, keep these best practices in mind:

1. 1. 1. Be specific and fair: Target only direct competition, keep the timeframe limited (usually 12–24 months), and limit geography to where the business actually operates.
      2. Tie it to the buyout: Courts are more likely to enforce an NCA when it’s part of a partner’s exit package.
      3. Use separate agreements: Don’t bury it inside a dissolution contract. A standalone NCA makes terms clearer and easier to enforce.
      4. Review local laws: State-specific laws can make or break enforceability, and vary dramatically. Always confirm compliance.

Alternatives to Non-Competes

If a non-compete won’t hold up in court, there are alternatives.

1. 1. • Non-solicitation Agreements: Stops former partners from targeting clients or employees
      • Confidentiality Agreements (NDAs): Protects trade secrets without limiting employment opportunities
      • Buy-sell Agreements: Prearranged terms for partner exits that help avoid disputes

Final Thoughts

A business divorce is often turbulent, but a well-crafted non-compete (or its alternatives) can prevent conflict and protect the company’s future. Whether you are the departing partner or the one staying, understanding your rights under a non-compete agreement is critical, so always seek legal guidance. Non-compete law is evolving rapidly, especially with recent FTC proposals to ban or limit NCAs. What’s enforceable today may not be tomorrow.

Need Help Navigating a Business Split?
Whether you’re planning ahead or currently going through a business separation, getting experienced legal advice is key. Our experienced team is here to help navigate all aspects of business divorce. In addition, we welcome the opportunity to review your LLC or partnership’s governing documents to ensure you and your company are prepared to efficiently handle any future business divorce.