A noncompete agreement (also known as a “covenant not to compete”) is defined as “[a] promise, usually in a sale-of-business, partnership, or employment contract, not to engage in the same type of business for a stated time in the same market as the buyer, partner, or employer.”[1] State law governs whether a non-compete agreement is enforceable.
Colo. Rev. Stat. § 8-2-113 and the case law interpreting it apply to non-compete agreements in Colorado. Colorado has long disfavored non-compete agreements. Under Colo. Rev. Stat. § 8-2-113, restrictive covenants are void and unenforceable except in specific circumstances. One of those exceptions applies to the purchase and sale of a business or the assets of a business (colloquially known as the “mergers and acquisitions exception” or the “M&A Exception”).
Covenants not to compete are important in mergers and acquisitions because they restrict the seller from competing with the buyer and/or the newly acquired company or business for a specific time within a defined geographical region following the sale. This protects the buyer’s investment in the newly acquired business or company.
Recently, the Colorado legislature amended the M&A Exception found in Colo. Rev. Stat. § 8-2-113. This article discusses SB25-083, amending the statute and its anticipated impact on future mergers and acquisitions.
SB25-083
On June 3, 2025, the Governor signed SB025-083[2] into law. The new law went into effect on August 6, 2025 and it governs non-compete agreements entered into on or after that date. SB025-083 does not invalidate pre-existing agreements. Applicable here, SB025-083 amended the M&A Exception to the general prohibition on non-compete agreements.[3]
Prior to passing SB25-083, the law simply provided that the prohibition on non-compete agreements did not apply to “[a] covenant for the purchase and sale of a business or the assets of a business.”[4] SB25-083 maintains the exception but revises and clarifies it.
Going forward, “[a] covenant not to compete related to the purchase and sale, a direct or indirect ownership share in a business, or all or substantially all of the assets of a business that restricts competition by an owner of an interest in the business” is enforceable under Colorado law.[5]
However, for an individual who owns a minority ownership share of the business and who received their ownership share in the business as equity compensation or otherwise in connection with services rendered, a statutory formula now dictates the length of time the covenant not to compete is enforceable. Specifically, the duration in years of the non-compete agreement with such a minority owner:
…must not exceed a number calculated by the total consideration received by the individual from the sale divided by the average annualized cash compensation received by the individual from the business, including income received on account of their ownership interest during the preceding two years or during the period of time that the individual was affiliated with the business, whichever period of time is shorter.
In other words, the length of the non-compete agreement in such a minority ownership scenario must be equivalent to the amount of money the minority owner receives from the sale divided by the minority owner’s wages, salary, distributions, and any other income or compensation from the business over the past two years or the time period the minority owner was affiliated with the business if that is less than two years.
Impact of SB25-083 on Mergers & Acquisitions
Starting on August 6, 2025, new agreements for the purchase or sale of a business, a direct or indirect ownership share in a business, or all or substantially all the assets of a business that restrict competition by an owner of an interest in the business may legally include a non-compete agreement. However, if a sale involves a minority owner who received their ownership share in the business as equity compensation or otherwise in connection with services rendered, a non-compete agreement must be limited in duration based on an application of the formula found in SB25-083, or it may not be enforceable.
These rules are anticipated to continue to protect buyers from the threat of competition from the Seller after the sale of a business. It will be important, though, to comply with the new requirements of the statute to ensure that covenants not to compete are enforceable after the sale.
Our Team
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[1] https://legal.thomsonreuters.com/blog/what-is-a-noncompete-agreement/
[2] https://leg.colorado.gov/bill_files/40988/download
[3] Colo. Rev. Stat. § 8-2-113 contains other exceptions to the general prohibition on non-compete agreements applicable to certain types of employees and trade secrets. It should be noted that SB25-083 made several changes regarding non-complete agreements applicable to health care employees and providers, but those changes are outside the scope of this article.
[4] Id.
[5] Id.