Noncompete After Selling a Business: Perot's Waiting Game

A noncompete after selling a business is a promise, paid for inside the purchase price, that the seller will not use the sold company's customers, people, or know-how to compete with the buyer for a set period in a defined field. Courts treat it as part of what the buyer bought, so it usually holds. Its definitions shape the seller's next years far more than the headline price does.

Ross Perot is the clearest case in American business history. He founded Electronic Data Systems in 1962¹ and sold it to General Motors in 1984 for about $2.5 billion.² But the clause that governed his next chapter arrived two years later, when — after a very public quarrel with GM's board — the company bought out his remaining stake² for roughly $700 million.¹ Attached to that check were multiple restrictions (18 months for hiring, 3 years for noncompete),³ and the rest of the decade was spent inside them.

What is a noncompete after selling a business?

It is a covenant — a binding promise, usually sitting in the purchase agreement or a short document signed at closing — that the seller will not compete with the business being sold, for a defined time, in a defined territory or field. The buyer's logic is plain. A large share of almost any purchase price pays for goodwill: customer relationships, reputation, and the accumulated knowledge of how the work actually gets done. If the person who built those relationships can open a rival the following month and call the same customers, the buyer has paid full price for an asset the seller kept.

The word rarely travels alone. Companion promises usually sit beside it: do not solicit the customers, do not hire the people, do not use the confidential methods, sometimes do not criticise the buyer in public. Owners who read only the heading "noncompete" are reading the title of the restriction rather than the restriction.

Why is a noncompete enforced after a sale when employee versions often are not?

Because they are different bargains, and courts have long said so. An employee noncompete tries to stop a worker from taking a job, with a livelihood on one side of the scale. A sale noncompete stops a former owner from reclaiming goodwill the buyer just paid for, and the payment is obvious — it is the purchase price. A clause that would collapse in an offer letter can stand comfortably in a purchase agreement.

California illustrates the split rather than contradicting it. The state is famously hostile to employee noncompetes, yet it has long kept a statutory path for a covenant tied to the sale of an ownership interest. The federal rule that would have voided most worker noncompetes was blocked in court before it took effect, and even its own text made room for covenants given by a person selling a business. The practical conclusion for sellers is the same in every jurisdiction: assume the clause will be enforced, and negotiate its words before signing rather than hoping a judge will soften them afterwards.

How long does a noncompete last after selling a business?

There is no national standard. The term is negotiated, and a court later asked to enforce it generally asks whether the length is longer than necessary to protect the goodwill that changed hands. Three to five years is the range many private-company sales argue over — a rule of thumb rather than a rule of law, with longer terms common in small, relationship-driven businesses.

Duration is also the least informative part of the clause. A two-year ban on any business the buyer or its affiliates might later enter, anywhere in the world, can occupy more of a life than a five-year ban on the actual trade, in the actual territory, with the actual customers. Where part of the price is deferred, the two documents have to be read together: because an earnout leaves money in the buyer's hands after closing, a covenant dispute can become a second argument about cash that was supposed to be settled.

What did Perot's noncompete actually forbid?

Restricted for-profit work only until December 1989,¹⁰ he could not compete with EDS for a profit, and he could not hire away its executives.⁵ The agreement also barred public criticism of GM, backed by a financial penalty.⁶ It was not a blank wall: after an initial period it left room for a venture that did not seek profit, and Perot read that room as permission.

He founded Perot Systems in 1988,⁷ well inside the term, with a handful of former EDS people,⁸ and took on work for the U.S. Postal Service structured so the new firm would earn nothing until the restriction lapsed.⁸ EDS read the same words as a breach and sued.⁹ A Virginia court then ordered Perot Systems to stop soliciting or performing work that contemplated a profitable return at any point — including contracts signed early whose money would arrive later. The Postal Service work was suspended by the GSA Board of Contract Appeals.¹¹ The covenant never stopped him from founding a company. It decided, through a judge rather than through his own reading, which contracts counted as competing.

Can a founder start another company while the noncompete runs?

Often yes, and that is precisely where the trouble starts. Most sale covenants do not say "do not work." They say "do not compete," and then define competing in a paragraph that receives less attention at closing than the wire instructions. An adjacent field, a minority stake, a board seat, advice to a customer of the sold business, a venture launched with a former lieutenant — each may be permitted, prohibited, or simply unaddressed.

Perot Systems is the cautionary version of yes. A clever structure invented after signing is how these disputes begin, not how they end. The usable practice is the reverse order: name the intended next venture, in plain words, in the agreement itself. Permission to build something that is not a rival belongs in the contract. It should not be discovered in a complaint.

Can a seller invest in or advise other companies during the restricted period?

Usually yes, but only inside carve-outs that are actually written down. The common exception allows passive holdings of a small stake in a publicly traded company. Better-drafted agreements add more: board seats in unrelated industries, investments already held and disclosed at signing, teaching, writing. What no covenant automatically allows is backing a private company in the same field, even as a minority investor, or advising one informally. There is no magic percentage that makes a holding safe, and silence in the document is not a safe harbour.

This is where newly liquid owners get caught, because deploying capital feels nothing like competing. In the buyer's reading it frequently is. The discipline is to list, before closing, every activity likely to arise over the restricted years — investing, mentoring, a side venture, a family office that will see deals in adjacent sectors — and have each one carved out in writing.

What happens if the seller breaks the covenant?

The buyer sues, and the remedy that matters most in practice is an injunction: a court order to stop. Damages follow later, if lost business can be proven, but the order is what changes a founder's week. It can freeze a contract, halt a hire, or delay a launch while the argument grinds on. Perot had resources almost no seller has, and he still spent the back half of his three years operating inside a court order.

A breach can also trip other terms of the sale. Some agreements treat it as grounds to hold escrowed money or to press an indemnity claim, which entangles proceeds that have not yet been received. None of this means every angry letter from a buyer wins. It means the cost of the fight is borne mostly by the side that has already given up the business.

Does the noncompete change how the sale is taxed?

It can change the character of the proceeds, which is a separate question from the amount. A purchase price is allocated among the things being bought, and that allocation follows both parties into their tax returns. Amounts assigned to goodwill are generally treated as capital gain to the seller. Amounts assigned specifically to the covenant are generally treated as ordinary income, because the rules see them as payment for a promise not to compete rather than for an asset sold. Buyer and seller are expected to report the same split, on an asset acquisition statement each files.

Buyers often have little to lose from loading value onto the covenant, and the negotiation over that line is easy to skip once the headline number is agreed. The question worth asking before signing is how much of the price is being attributed to the promise, and why — a small line on a schedule that can move the after-tax result more than a modest bump in price would. A tax advisor reading the allocation against the seller's own circumstances is the only place that conversation should conclude.

What are the waiting years actually for?

They are for whatever was decided at signing — which is the argument for deciding then, rather than discovering it later. Perot's difficulty was that his plan and the covenant's words did not match, and the mismatch was settled by a judge. Owners who intend to build again can use the restricted years to study an industry from the outside, which almost no operator inside a company ever gets to do. Owners who may not build again meet a harder question sooner than they would have chosen, which this publication has written about as the identity problem that arrives when the calendar empties.

Perot Systems was eventually bought by Dell in 2009 for about $3.9 billion⁷ — a historical price, not a moral, and no evidence that time repairs a badly read clause. The durable point sits earlier. A sale transfers two things: a company, and a defined stretch of the seller's own working life. Most negotiations price the first with great care and treat the second as boilerplate, because it does not change the amount on the wire. It changes nearly everything that comes after it.