Non-Solicitation Agreements in M&A: What Founders Need to Know
The acquisition agreement is signed. The celebration is brief. Then comes the stack of ancillary documents, including a non-solicitation agreement that will govern your relationship with former employees and customers for years after the transaction closes.
These agreements receive less attention than they deserve during negotiations. Founders focused on headline price and deal structure often treat restrictive covenants as boilerplate. That is a mistake. The constraints you accept can materially affect your post-exit options, and the regulatory landscape governing these provisions has shifted significantly in recent years.
The Landscape of Restrictive Covenants
M&A transactions typically include several categories of restrictive covenants, each serving different purposes:
Non-competition agreements prohibit the seller from competing with the acquired business for a defined period, typically three to five years. The buyer pays for a going concern and wants assurance the seller will not immediately launch a competing venture.
Non-solicitation of employees prevents the seller from recruiting former employees to a new venture. Key talent is often essential to the acquired business's value, and buyers seek protection against losing that talent to the departing founder.
Non-solicitation of customers bars the seller from pursuing relationships with customers of the acquired business. The customer base represents a core asset, and buyers want protection against the seller leveraging those relationships for competing purposes.
Confidentiality provisions restrict disclosure of proprietary information learned during ownership. Trade secrets, customer data, and business processes all fall within typical confidentiality scope.
Legal analysis from Mintz confirms that these four categories, along with non-disparagement provisions, represent the most common restrictive covenants in private equity transactions. The survival period for non-competition covenants typically spans three to five years following closing.
The Regulatory Shift
The enforceability of restrictive covenants, particularly non-competes, has become increasingly contested. Understanding the current regulatory environment helps founders evaluate what protections they can reasonably resist and what provisions are likely to be enforced.
FTC Enforcement Activity
The Federal Trade Commission has taken an aggressive posture toward non-compete agreements, though its approach continues to evolve. The agency's proposed blanket ban on employer-employee non-competes generated significant attention in 2024, but subsequent developments have modified the regulatory picture.
Current analysis indicates the FTC has abandoned pursuit of a blanket prohibition rule. However, enforcement remains a priority. In September 2025, the FTC filed an enforcement action against a company whose non-competes were deemed overly broad, simultaneously launching a public inquiry to gather information for future enforcement actions.
The critical distinction for M&A transactions: non-compete agreements in the context of selling a business remain legal in all fifty states. The restrictions and heightened scrutiny apply primarily to employment contexts, not to sellers who receive substantial consideration for their equity interests.
State-Level Variation
State law governs enforceability of restrictive covenants, creating significant geographic variation.
California, Oklahoma, Minnesota, and North Dakota generally ban non-competes in employment relationships, though each provides exceptions for restrictions tied to business sales. Even California, which prohibits employment non-competes outright, permits such provisions when a business owner sells their company.
Other states impose varying restrictions: salary thresholds below which non-competes cannot apply, duration limits, geographic scope requirements, and procedural notice obligations. A covenant enforceable in Texas may be unenforceable in Massachusetts.
For M&A transactions involving multi-state operations, choice of law provisions determine which state's rules govern. Sophisticated buyers will select governing law that maximises enforceability, while founders should understand what they are agreeing to under the chosen jurisdiction.
The Sale-of-Business Exception
The sale-of-business exception exists because the policy concerns underlying employment non-compete restrictions do not apply equally to business sales.
Employment non-competes restrict worker mobility, potentially suppressing wages and limiting career advancement. These concerns drive the regulatory pushback in employment contexts.
Sale-of-business non-competes serve a different function. A buyer paying substantial consideration for goodwill reasonably expects the seller will not immediately destroy that goodwill by competing. The seller receives compensation for accepting the restriction, often embedded in the purchase price itself. The power imbalance that characterises employment relationships is absent when sophisticated parties negotiate an M&A transaction.
The FTC's proposed rule, when active, explicitly exempted non-competes where the restricted party owns at least 25% of the business entity. This threshold recognises that meaningful equity ownership changes the calculus.
Negotiating Scope and Duration
Within the permissible framework, significant room exists to negotiate covenant terms. The dimensions that matter most:
Duration
Standard non-compete terms in M&A range from three to five years post-closing. Shorter periods are achievable, particularly when the seller's transition role is limited or when competitive concerns are modest.
Founders should push back on durations exceeding five years. Courts increasingly scrutinise extended restrictions, and buyers typically cannot demonstrate legitimate business interests requiring such lengthy protection.
Geographic Scope
Non-competes should be limited to markets where the acquired business actually operates. A software company selling to US customers should not accept worldwide restrictions. A business with regional operations should not be restricted from entirely different geographic markets.
For software and technology businesses, geographic restrictions can be particularly contentious. Software sells globally through digital channels, and buyers may argue for broad geographic coverage on that basis. Founders can counter that relevant competition occurs in specific customer segments, not everywhere the internet reaches.
Scope of Restricted Activity
Precise definition of what constitutes "competing" matters enormously. A restriction against operating "any business that competes with the company" differs materially from one that prohibits "developing software for [specific market segment]."
Founders planning subsequent ventures should negotiate carve-outs for activities that do not directly compete: adjacent markets, different customer segments, non-competing technologies. The time to secure these carve-outs is during deal negotiation, not afterward when the buyer has no incentive to accommodate.
Non-Solicitation Specifics
Employee non-solicitation provisions should distinguish between active solicitation and passive hiring. A restriction on "soliciting" former employees may permit hiring someone who applies independently. A restriction on "hiring" regardless of who initiated contact is more burdensome.
Customer non-solicitation similarly benefits from precision. Restrictions on "soliciting" customers may permit responding to inbound inquiries. Restrictions on "doing business with" customers regardless of who initiates contact are more restrictive.
Latham & Watkins analysis cautions that non-solicitation agreements prohibiting workers from soliciting former clients can be deemed anticompetitive if drafted so broadly they effectively prevent the worker from seeking other employment or starting a business. Narrow tailoring protects both enforceability and the founder's future options.
No-Poach and Wage-Fixing Concerns
Separate from traditional non-solicitation provisions, acquirers sometimes seek agreements that raise antitrust concerns.
No-poach agreements between competitors, where companies agree not to recruit each other's employees, face criminal enforcement risk. The 2025 antitrust guidelines explicitly warn that criminal or civil liability may attach to agreements between competitors not to hire, solicit, or compete for workers.
Wage-fixing agreements, where companies agree on salary ranges or compensation terms, carry similar risk.
These concerns arise most directly in horizontal transactions where buyer and seller were competitors pre-acquisition. Post-transaction arrangements that effectively perpetuate no-poach or wage-fixing dynamics can trigger enforcement even when structured as M&A covenants.
Founders should be cautious about provisions that extend beyond protecting the acquired business's specific interests. Restrictions that benefit the buyer's broader competitive position, rather than protecting deal value, may face scrutiny.
Enforcement Realities
Understanding how restrictive covenants are actually enforced helps founders assess risk realistically.
Enforcement typically requires the buyer to demonstrate harm. A founder who starts an unrelated business in a different market faces low enforcement risk regardless of covenant terms. A founder who launches a directly competing product, recruits key employees, and solicits former customers faces high risk.
The cost of enforcement also matters. Litigation is expensive, and buyers may conclude that pursuing a founder who is technically in violation but causing minimal harm is not worth the cost. Conversely, clear and serious violations will draw response from buyers protecting valuable assets.
The negotiating implication: founders should prioritise the restrictions most likely to actually bind them. If you have no intention of competing in the same market, a non-compete is less important than customer and employee non-solicitation terms. If you plan to hire former colleagues for a future venture, employee non-solicitation terms matter more than anything else.
Practical Recommendations
Founders approaching restrictive covenant negotiations should keep several principles in mind.
Engage early. Do not treat restrictive covenants as closing-day details. Raise concerns during letter of intent negotiations, when you have maximum leverage. Once price and structure are agreed, buyers feel entitled to standard protective provisions.
Be specific about concerns. Vague objections to "restrictive covenants" carry less weight than specific requests: "I need a carve-out for [specific activity] because I plan to [specific future plan]." Buyers can accommodate concrete requests more easily than general discomfort.
Understand the buyer's interests. Buyers seek protection against genuine risks, not theoretical ones. Understanding what the buyer actually fears helps you propose alternatives that address their concerns while preserving your flexibility.
Get legal review. Restrictive covenant enforceability depends on jurisdiction-specific analysis. Counsel experienced in your governing jurisdiction can advise what provisions are standard, what is negotiable, and what risks various formulations create.
Document carve-outs. Any negotiated exceptions should be explicit in the agreement. Verbal assurances that "we would never enforce that" provide no protection. If it matters, get it in writing.
The Founder's Balance
Restrictive covenants represent a trade-off. Buyers pay for protection against competitive harm; sellers receive consideration for accepting constraints. Finding the right balance requires understanding what constraints actually matter for your post-exit plans and negotiating accordingly.
The regulatory environment has shifted toward greater scrutiny of overly broad provisions, particularly those that function as de facto employment restrictions rather than legitimate protection of transaction value. Founders can leverage this shift to negotiate narrower, more reasonable terms.
But the sale-of-business context remains fundamentally different from employment relationships. Buyers will continue to seek, and courts will continue to enforce, reasonable restrictions that protect the value they are acquiring.
If you are evaluating a transaction and want perspective on restrictive covenant terms, we welcome the conversation.