Most sellers read the price and the payment schedule first when a draft purchase agreement lands. Both matter. But the section that quietly shapes the next five to ten years of a seller's professional life is not the price - it is the restrictive-covenant block, usually a few pages of non-competition, non-solicitation, and non-disclosure provisions embedded in the middle of the document.
These provisions determine what you can and cannot do after closing. They determine which clients and employees are off-limits. They determine which industries you can work in, in which geographies, for how long. And they interact with allocation of purchase price and post-close taxation in ways that are not obvious until legal and tax advisors walk through them together.
This piece is about the topics worth raising with those advisors before signing. It is educational and general - your specific situation may raise entirely different considerations, and none of this is legal, tax, or investment advice.
Why buyers ask for these covenants at all
From the buyer's perspective, restrictive covenants protect the enterprise value they just paid for. The business's client relationships, employee relationships, and proprietary methods all get transferred at closing. Without covenants, the seller could set up next door the next morning and take much of what they just sold.
Courts recognize this. Most US jurisdictions will enforce a reasonably-scoped non-compete tied to a business sale (as opposed to a non-compete tied to employment, which faces much higher scrutiny). The Federal Trade Commission has been reviewing broader non-compete policy in recent years, and enforceability varies significantly by state, so state-specific counsel is essential.
The buyer's baseline draft is almost always broader than what any court would actually enforce. That is not adversarial - it is a negotiating starting point. Your legal counsel narrows it during negotiation.
Topics to raise on the scope of activity restricted
The non-compete's scope of activity determines what work you cannot do post-close. Common scope-of-activity questions to walk through with counsel:
- Is the restriction limited to the same line of business as the sold company, or does it extend to adjacent businesses? Adjacent scope is often over-broad.
- Does it cover consulting or advisory work in the same industry, or only operating a competing company? These are different economic outcomes.
- Does it cover passive investment in a competing company? For sellers who plan to be angels or LPs in the industry, this matters.
- Does the restriction apply to work as an employee for a competitor, or only as a founder/owner?
Each of these has a large effect on what post-close life looks like. A seller who plans to fully retire may not care. A seller who plans to stay professionally active in the same industry may care very much.
Topics to raise on geographic scope
Geographic scope is usually easier to negotiate than activity scope but is worth explicit review:
- Does the restriction apply everywhere the buyer operates, or everywhere the sold company operated? These can be very different geographies.
- Does it include future geographies the buyer expands into after closing? A buyer who plans to expand nationally can effectively expand the seller's restriction post-close if the drafting is broad.
- Does it treat online / national services differently from location-based services?
- If the business has customers in multiple countries, does the covenant reach into countries where the seller has no plans to work anyway?
An enforceable non-compete has to be reasonable in geographic scope. What is reasonable depends on the actual footprint of the business and the market. Your counsel is the right resource for the state-by-state variation.
Topics to raise on time duration
Duration is where courts most often scrutinize sale-related non-competes. Reasonable durations in a sale context are typically longer than in an employment context, but not unlimited.
- What is the proposed duration? Two years, five years, longer?
- Does the duration start at closing, or at a later date (such as end of employment as an earnout consultant)?
- Are there tolling provisions that extend the duration if there is a dispute?
- Does the duration interact with earnout periods or seller financing repayment periods?
The tolling and interaction questions are often where the trap lies. A "five year" non-compete that tolls during any dispute can become a much longer restriction in practice.
Photo by Karol D on Pexels
Topics to raise on non-solicitation of customers
The non-solicit of customers is often more consequential than the non-compete for sellers who plan to stay in the industry. It typically prohibits the seller from directly soliciting the sold business's customers for a defined period. Questions to review:
- Is the restriction limited to customers who did business with the company during a defined lookback period? A "any customer ever" scope is over-broad.
- Does it prohibit responding to inbound inquiries from those customers, or only outbound solicitation?
- Does it apply to prospective customers the company was pursuing at time of closing? This can be surprisingly broad if the pipeline was extensive.
- Are affiliated companies of customers also covered? A restriction that lists "customer" might quietly include the customer's parent, subsidiaries, and sister companies.
Sellers who plan to consult in the same industry post-close should walk through these carefully. A seller who intends to fully change industries can be more flexible.
Topics to raise on non-solicitation of employees
The non-solicit of employees prevents the seller from hiring away key employees for a defined period. Common areas to review:
- Is the restriction limited to key employees, or does it cover any employee? Any-employee coverage is broader than most sellers assume they are agreeing to.
- Does it apply to employees who leave the company on their own initiative, or only to those the seller actively solicits?
- Does it include former employees within a defined lookback period (e.g., people who left the sold company in the two years before closing)?
- Does it interact with earnout consulting - can you request to work with employees you introduced to buyer during transition?
Employee non-solicits can be enforced more easily than non-competes in many states because they are seen as less restrictive of the seller's ability to earn a living. That does not make them less impactful for the seller's post-close plans.
Topics to raise on the tax allocation of covenant consideration
Restrictive covenants are often assigned a portion of the purchase price for tax purposes. The IRS treats this allocation as ordinary income to the seller (via Section 197) and amortizable over 15 years to the buyer. That treatment is different from the capital gains treatment that applies to allocations to goodwill or equity.
Topics to review with your tax advisor:
- Has the buyer's draft allocated significant purchase price to the covenants? A large covenant allocation converts capital gains into ordinary income for the seller.
- What is a reasonable covenant allocation given the specifics of the deal?
- Does your counsel and the buyer's counsel agree on the tax characterization?
- Does the allocation on the tax forms (Form 8594) match the allocation implied by the purchase agreement?
The tax questions are worth coordinating with your CPA before signing. The AICPA publishes accounting standards guidance that CPAs use for these allocations, and your specific CPA will walk you through what the numbers mean.
Topics to raise on interaction with employment agreements
If you are staying on post-close as an executive, consultant, or transition-services provider, your employment agreement will typically include its own restrictive covenants that layer on top of the sale-agreement covenants.
- Do the two sets of covenants have different scopes, durations, and geographic reach? If yes, which controls?
- Are the covenants coextensive, or does the employment agreement extend the sale covenants effectively?
- What happens to the covenants if you resign, are terminated for cause, or are terminated without cause?
- Do the covenants survive if the buyer sells the business to a third party?
The last question is not hypothetical. Buyers often flip businesses within a few years, and a seller's covenants may end up being enforced by an entity the seller never intended to grant covenants to.
Topics to raise on carve-outs
Almost every sale non-compete has carve-outs for specific activities the seller wants to preserve. Common carve-outs to consider raising:
- Ownership of publicly-traded securities (typically capped at a small percentage)
- Ownership of the seller's family investment vehicles that were disclosed at diligence
- Charitable, educational, or advisory activities that do not compete
- Specific relationships or activities the seller had before the business was founded
Getting carve-outs into the drafting stage is much easier than trying to negotiate them mid-signing.
Topics to raise on enforcement mechanics
Enforcement provisions determine what happens if a dispute arises. Areas to review:
- Choice of law and venue. Some states enforce non-competes more readily than others.
- Injunctive relief provisions. Buyers usually want the ability to seek injunctions.
- Attorney's fees provisions. Who pays if there is a dispute?
- Blue-pencil provisions. Can a court narrow an over-broad covenant, or does an over-broad covenant get thrown out entirely?
These interact with state law in ways that require your counsel's specific input.
Photo by Gustavo Fring on Pexels
Bringing this to your advisors
The restrictive covenants section of a business-sale agreement is negotiable. It is not standard boilerplate. Buyers propose broadly and expect sellers to push back through counsel.
Your legal counsel handles the drafting negotiation. Your tax advisor handles the allocation and characterization. Your financial or wealth advisor helps think through how the post-close restrictions interact with your longer-term professional and financial plans.
At Capivise we help sellers coordinate the advisor team that reviews these provisions before signing. The business sale advisor page explains our role in that coordination. For sellers still choosing an advisor team, the questions to ask an advisor page walks through the vetting process. The advisor match tool helps sellers get connected with vetted M&A-experienced advisors.
For general educational reading on restrictive covenants in business sales, the SEC's Investor.gov site covers the securities-law overlays when the deal involves stock consideration.
None of this is legal or tax advice, and every deal has specifics that only your own advisors can address. The right time to raise these topics is before signing - once the agreement is executed, the terms are much harder to change.
