You are selling your South Dakota business — or buying one — and the purchase agreement contains the clause every deal has: the seller promises not to open a competing shop down the street. For years, that promise routinely ran five years, sometimes longer. As of July 1, 2026, any ownership-transfer non-compete that stretches past three years is unenforceable. If your paperwork still says five, the extra two years are dead weight, and depending on how the clause is written, the overreach could put the enforceable part at risk too.
The change comes from House Bill 1180, signed March 12, 2026, which adds a new section to South Dakota Codified Laws chapter 53-9. Here is what the new law says, the gap it fills, and exactly what both sides of a deal should rewrite before closing.
What HB 1180 Actually Changed
South Dakota starts from a skeptical place on non-competes. The default rule voids any contract restraining someone from exercising a lawful profession, trade, or business, and only a handful of narrow statutory exceptions survive — the sale of goodwill, partnership dissolutions, employee covenants, and a few specialized cases. Courts construe those exceptions narrowly: if your agreement does not fit squarely inside one, it fails under the general rule.
HB 1180 creates a new exception for a situation the old statutes never clearly covered: an owner transferring an ownership interest in a business entity. The new section provides that in any governing document of a business entity, or as part of a contract for the purchase, sale, or transfer of an ownership interest, the parties may agree that the departing owner will not engage — directly or indirectly — in the same or similar type of business the entity conducted during that owner's period of ownership, within the specified geographic area where the entity conducts business, for up to three years from the date of transfer.
Three things about that sentence matter enormously. First, it affirmatively validates these covenants, which previously lived in a gray area between the sale-of-goodwill exception and the employee-covenant rules. Second, every element is a limit, not a suggestion: same-or-similar business, tied to the ownership period, tied to the entity's actual footprint. Third, the three-year clock runs from the date of transfer — not from signing, not from closing of some later tranche, and not from whenever the buyer gets around to enforcing it.
The Gap It Fills: Buyouts and Equity Transfers
To see why the legislature acted, consider the transactions the old exceptions handled awkwardly. The sale-of-goodwill statute covers a person selling the goodwill of a business and agreeing not to carry on a similar business in a specified area. That maps cleanly onto asset sales. It maps poorly onto the deals small businesses actually do most often: one member selling an LLC interest back to the company, a partner buyout, a shareholder redemption, a co-owner exiting through a buy-sell provision in the operating agreement.
In those deals, nobody is exactly "selling the goodwill of a business" in the classic sense — the entity keeps operating, and only the ownership changes hands. Buyers still demanded non-competes, often for five years or more, and everyone hoped a court would treat them as sale-of-business covenants. HB 1180 ends the guessing. Governing documents and transfer contracts can now carry an owner non-compete with explicit statutory backing — capped at three years.
Note what the bill did not touch. The sale-of-goodwill exception has no statutory time limit, and the employee-covenant rules still carry their own two-year limit plus geographic, existing-customer, and like-business restrictions. The new three-year cap sits alongside those rules, governing ownership-interest transfers specifically. Which exception your covenant falls under now matters more than ever, because each carries different limits.
The Three Limits, Spelled Out
Every owner covenant under the new section must satisfy all three of these constraints:
1. Same or similar business, during your ownership window
The restraint covers only the same or similar type of business the entity conducted during the transferring owner's period of ownership. A seller who owned a residential roofing company cannot be barred from commercial solar installation unless the entity actually did that work while they owned it — and a buyer who later expands into new lines cannot stretch an old covenant to cover territory the entity never occupied during the seller's tenure. When you draft the activity description, describe what the business actually did, not what the buyer hopes it becomes.
2. The geographic area where the entity conducts business
The covenant must name a specified geographic area, and the statute ties it to where the entity conducts business. Statewide bans for a business with customers in two counties are exactly the kind of overreach that fails the narrow-construction test. Match the radius to the real market: customer concentrations, delivery routes, service territories, advertising footprint. If the business genuinely serves the whole state, say so and be prepared to show it. If it serves Sioux Falls and the surrounding counties, write that.
3. Three years from the date of transfer, maximum
This is the headline change. The typical non-compete tied to a business sale runs three to five years, with five years the most common figure brokers and deal lawyers reach for. Under the new law, anything beyond three years from the transfer date is unenforceable in an ownership-transfer covenant. Pin the transfer date precisely in the agreement — especially in installment buyouts, phased redemptions, and earnout deals where "the transfer" could otherwise mean three different dates.
What It Means If You Are Selling
If you are the departing owner, the new cap is leverage and protection at once. Any buyer demanding five years is asking for something South Dakota courts cannot enforce past year three. That does not mean you should sign a five-year clause and quietly rely on the statute to save you — litigating enforceability is expensive even when you win, and a court asked to enforce an overbroad covenant is not a forum you want to be in. Push the paper to match the law: three years, accurately described business scope, honest geography.
There is a second, subtler point for sellers. Shorter covenants can shift the economics of the deal. Buyers pay for protection, and a buyer losing two years of it may try to recover that value elsewhere — a lower price, a larger escrow, tougher earnout terms, or a bigger allocation of the purchase price to the covenant itself. That last move deserves your attention for tax reasons, discussed below: sellers generally prefer purchase price allocated to goodwill or stock, which produces capital gain, rather than to the non-compete, which is typically ordinary income. If the buyer wants to re-cut the allocation because the covenant got shorter, make sure your tax advisor is in the room.
Finally, check your existing governing documents. Many operating agreements and buy-sell provisions drafted years ago contain transfer-triggered non-competes of four, five, or even ten years. Those provisions were written for a legal landscape that no longer exists. If your exit will close on or after July 1, 2026, those clauses need amendments before the transfer — not after, when the transfer date has already started a clock on paper that overpromises.
What It Means If You Are Buying
If you are the buyer, you just lost up to two years of contractual protection you may have been counting on. The answer is not to draft around the statute with creative labeling — a "consulting restriction" or "exclusivity covenant" that walks and talks like a non-compete will be treated like one. The answer is to layer protections the statute does not cap:
- Customer and employee non-solicitation. The three-year cap governs competing, not poaching. Separate, well-drafted non-solicitation provisions protecting the customer list and the workforce remain essential and are analyzed under their own rules.
- Confidentiality and trade secrets. Customer data, pricing, recipes, processes, and proprietary methods should be protected by standalone confidentiality obligations that do not expire with the non-compete clock.
- Transition services and training. A seller who spends six to twelve months introducing you to key accounts transfers goodwill faster than any covenant preserves it. Put the transition duties, hours, and milestones in writing, with part of the consideration tied to completing them.
- Earnouts and seller notes. When part of the seller's payout depends on post-closing performance, the seller's financial incentive aligns with yours during exactly the window the non-compete covers — and beyond it.
- Key-employee retention. In many small businesses, the flight risk that matters is not the seller but the seller's best technician, salesperson, or manager. Retention bonuses and employment agreements with the people who actually hold customer relationships often protect more value than adding years to the seller's covenant.
And be precise about geography. Buyers habitually ask for areas far larger than the business serves, on the theory that asking costs nothing. Under a narrowly construed statute, asking costs plenty: an indefensible radius invites a court to question the whole clause. A tight, evidence-backed territory is worth more than a sprawling one.
The Asset-Sale Wrinkle You Need to Understand
Here is the structural question every South Dakota deal team should now ask early: is this an asset sale or an ownership-interest transfer? The sale-of-goodwill exception, which classically covers asset deals, carries no statutory time limit. The new three-year cap governs covenants tied to transferring an ownership interest in an entity. In a stock sale, membership-interest sale, or partner buyout, the three-year cap plainly applies. In a straight asset sale where the seller conveys goodwill to the buyer, the older exception is the natural home — and it has no cap written into it.
Do not treat that as a loophole to drive a ten-year covenant through. Courts still test sale-of-goodwill covenants for reasonableness in duration, scope, and geography, and a duration the legislature has now declared excessive for the closely related ownership-transfer context will be a hard sell. But the distinction genuinely matters for drafting: identify which statutory exception your covenant relies on, draft inside its limits, and say so in the agreement. Deals with mixed consideration — some assets, some equity, a redemption plus an asset purchase — should specify which covenant attaches to which transfer rather than leaving a court to sort it out.
The Tax and Bookkeeping Angle
Non-competes are not just legal protections; they are priced assets with tax consequences both sides must book correctly. Amounts a buyer pays for a covenant not to compete in connection with acquiring a business are Section 197 intangibles, amortized straight-line over 15 years regardless of the covenant's actual length. Your three-year South Dakota covenant still amortizes over 15 years on the buyer's return — the tax clock and the legal clock have nothing to do with each other.
The purchase price allocation, reported by both sides on Form 8594, is where this bites. Buyer and seller must report consistent allocations across the deal's asset classes, and their preferences point in opposite directions: buyers generally favor allocating more to the amortizable covenant, while sellers favor allocating more to goodwill or stock for capital-gain treatment. A shorter enforceable covenant arguably supports a smaller allocation to it — three years of protection is worth less than five — which can become a genuine negotiating point rather than a mere paper exercise. Whatever you agree on, book the covenant as its own intangible asset, amortize it over 15 years, and keep the valuation support with the deal file. An allocation neither side can defend is an audit adjustment waiting for both of you.
For sellers, there is also a bookkeeping discipline point: any consulting payments, transition-service fees, or earnout amounts layered in as substitutes for the lost covenant years are ordinary income in the year received, distinct from the sale proceeds. Track them in separate accounts from day one so estimated-tax planning reflects reality instead of discovering it in April.
A Pre-Closing Checklist for Deals Closing Now
The cap applies to transfers on or after July 1, 2026 — covenants already running from earlier transfers are not rewritten by the statute. If your deal closes after that date, work through this list before the transfer:
- Find every covenant. Purchase agreement, operating agreement, buy-sell provisions, shareholder agreement, side letters. Ownership-transfer covenants hide in governing documents, not just deal paperwork.
- Cut duration to three years or less. Measure from a precisely defined transfer date, and define that date for phased and installment transfers.
- Rewrite the activity scope. Limit it to the same or similar business the entity conducted during the seller's ownership period — real history, not the buyer's business plan.
- Tighten the geography. Name the area where the entity actually conducts business, backed by customer and revenue data you could show a judge.
- Identify your statutory home. Know whether each covenant relies on the new ownership-transfer section or the sale-of-goodwill exception, especially in mixed asset-and-equity deals.
- Revisit the allocation. If the shorter covenant changes what the protection is worth, renegotiate the Form 8594 allocation deliberately, with tax advisors involved, rather than letting an old number ride.
- Layer the substitutes. Non-solicitation, confidentiality, transition services, earnouts, and key-employee retention should be signed alongside the covenant, not wished for later.
South Dakota did not ban sale-of-business non-competes — it did something more useful. It gave ownership-transfer covenants explicit statutory validity and, in the same breath, told both sides exactly how far that validity extends. Three years, honest scope, real geography. Deals drafted inside those lines will hold; deals drafted on old templates will not. Pull your templates out now, before the transfer date starts a clock your paperwork cannot keep.
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