Non-compete and non-solicit

Why does a cannabis buyer need a non-compete?

Because much of what the buyer pays for is goodwill, and the seller is the person best placed to take it back. A dispensary owner knows the customers, the staff, the vendors and which nearby sites are zoned for retail. A cultivator knows the wholesale accounts. Without a covenant, a seller could close on Friday and apply for a license down the road on Monday.

Cannabis has one natural protection that other industries lack. In capped markets and in cities with buffer rules, a seller cannot simply open a competing store, because there may be no license or compliant site available. That reduces the risk. It does not remove it. Sellers can join a competitor, fund one, or consult for one, none of which needs a new license.

Is there a federal ban on non-competes?

No. The FTC adopted a rule in 2024 that would have banned most non-competes, with an exception for the bona fide sale of a business. It never took effect. A federal district court in Texas set the rule aside on 20 August 2024. On 5 September 2025 the FTC moved to dismiss its appeals in the Fifth and Eleventh Circuits and accept the vacatur. In February 2026 the rule was removed from the Code of Federal Regulations. The FTC can still challenge individual agreements as unfair methods of competition, but seller covenants tied to a real sale have not been its target.

What does state law allow?

Every state treats a covenant given on the sale of a business more generously than one imposed on an employee. The details still differ.

State	Rule for sale-of-business non-competes
California	Business and Professions Code 16601: a person who sells the goodwill of a business, or all of their ownership interest, or substantially all operating assets with goodwill, may agree not to carry on a similar business within a specified geographic area where the sold business has been carried on, for as long as the buyer or its successor carries on a like business there
Colorado	Non-competes are void except for listed categories, one of which is the purchase and sale of a business. From 6 August 2025, under SB25-083, a minority owner who received the interest as equity compensation or for services can be bound only for a number of years equal to total sale consideration divided by average annualized compensation. Majority owners are not subject to that cap
Minnesota	Minn. Stat. 181.988 voids non-competes entered into on or after 1 July 2023, except those agreed during the sale of a business or in anticipation of dissolution, which must be reasonable in area and length
Most other states	Common-law reasonableness: the restriction must protect a legitimate interest, here purchased goodwill, and be reasonable in time, area and activity. Some courts will narrow an overbroad covenant; others strike it entirely

Illustrative, Colorado cap. A minority partner who earned her 15% through sweat equity receives $450,000 from the sale. Her pay and distributions averaged $150,000 a year. Her non-compete can run at most three years ($450,000 divided by $150,000). Her 60% partner can be bound for longer.

California’s wording has a practical consequence. A partner selling only part of an interest, or an owner whose deal transfers no goodwill, may fall outside section 16601. Structure matters; see asset sale vs membership-interest sale.

Drafting scope for a cannabis business

Restricted activity. Define it by license type. A seller of a retail store should not be barred from owning a testing lab or a hemp farm unless the buyer is paying for that.

Area. Match the trade area. Options are a radius from each licensed premises, a list of municipalities, or the counties where wholesale customers are located. In limited-license states a municipal list often works better than a radius, because competition is decided by which towns allow retail.

Duration. Tie it to how long the purchased goodwill needs to transfer. Longer periods invite challenge. California’s rule is unusual in running as long as the buyer carries on the business.

Passive investments. Carve out small passive holdings in public companies. In cannabis, also deal with stock the seller receives from an MSO buyer.

Existing operations. Schedule every license, application and property the seller keeps. Multi-license owners selling one asset need this most; see selling a multi-license portfolio.

Who is bound. Each selling owner, and key family members or affiliates who worked in the business, each of whom should receive identifiable consideration.

Non-solicit and no-hire terms

A non-solicit is narrower and easier to enforce than a non-compete. Typical subjects:

Covenant	Cannabis-specific point
Employees	Badged, trained staff are scarce. Bar the seller from hiring or soliciting them, with an exception for general advertisements. See employee transfer and agent badges
Customers and patients	Retail loyalty lists and medical patient records carry state privacy duties. The seller should deliver the data it may lawfully transfer and keep no copy
Wholesale accounts	For cultivators, manufacturers and distributors, name the top accounts or define them by purchases in the prior 12 months
Vendors and brands	Prevent the seller from inducing an exclusive brand or supplier to move to a competitor
Landlord	Bar the seller from interfering with the lease or negotiating for adjacent cannabis-zoned space

Pair these with a confidentiality covenant that survives closing. Pre-closing confidentiality is a separate document, covered on NDA and confidentiality.

Remedies

• Injunctive relief clause, with an acknowledgment that damages are inadequate.
• Tolling: the restricted period is extended by any period of breach.
• Set-off against deferred price, limited as described in the FAQ above. See seller notes and security interests.
• Fee shifting to the prevailing party.
• Severability and, where state law permits, authority for a court to narrow the covenant instead of voiding it.
• Governing law that matches where the business operates. Minnesota, for example, lets a protected party void clauses that move a Minnesota dispute to another state’s law or courts.

How is the non-compete taxed?

The price allocated to a covenant not to compete is a section 197 intangible, which the buyer amortizes over 15 years no matter how short the covenant is. The seller generally reports that amount as ordinary income, not capital gain. Sellers therefore want a small allocation to the covenant and a large one to goodwill; buyers are often indifferent, since both amortize over 15 years. Too small an allocation can, however, weaken the argument that the covenant was bargained for. The allocation is reported by both sides on Form 8594; see purchase-price allocation in cannabis deals.

When the seller stays on

If the seller will work for the buyer during a transition period, keep the sale covenant in the purchase agreement and do not rely on the consulting agreement for it. A covenant in an employment document may be tested under the stricter employee rules, and in California or Minnesota it could be void.

This page is general education, not legal advice. Restrictive covenants are state-specific and should be drafted by counsel in the state where the business operates.