Restrictive covenants when you sell

Somewhere in the sale agreement, usually after the price and the warranties, there is a clause that tells you what you cannot do once the deal completes. It is called a restrictive covenant, and owners often skim it because it feels like boilerplate. It is not. It shapes what you can do with your time, your contacts and your expertise for years after you sell.

Restrictive covenants are a normal part of UK and US SME sales, and a fair buyer is not trying to trap you with them. But the detail matters, and the time to get it right is before you sign, not when you want to start something new. Here is how we explain them to owners we speak with.

Why buyers ask for them

When someone buys your business, a large part of what they are paying for is goodwill: the customer relationships, the reputation and the know-how that you built. If you could walk out on completion day, open a competing firm down the road and call your old customers, much of that value could leave with you.

Covenants protect the buyer against that risk. In both the UK and the US, courts generally treat covenants given by someone selling a business more kindly than those in an ordinary employment contract, because the seller has been paid for the goodwill being protected. That does not mean anything goes. A covenant still needs to be reasonable to be enforceable, and the rules differ between jurisdictions and, in the US, from state to state.

The covenants you are likely to see

Most sale agreements include some combination of the following:

• Non-compete: you will not run, own or work for a business that competes with the one you sold.
• Non-solicit of customers: you will not approach the company's customers to take their business elsewhere.
• Non-dealing: a stronger version, where you cannot do business with those customers even if they come to you.
• Non-solicit of employees: you will not recruit the team you are leaving behind.
• Confidentiality: you will not use or share the company's confidential information after the sale.
• Non-disparagement: sometimes included, usually mutual, so neither side talks the other down.

Each one restricts something different. It is worth reading them separately rather than as a single block, because a non-solicit you are comfortable with can sit next to a non-compete that is far wider than you expected.

What makes a covenant reasonable

Three questions do most of the work: how long, where, and doing what.

Duration should match how long the goodwill genuinely needs protecting. A business whose customers buy once a decade is different from one where relationships turn over every year. Geography should reflect where the business actually trades, not everywhere it might one day reach. And the activity restricted should be the business you sold, defined clearly, not every industry you have ever touched.

There is a practical point here for both sides. A covenant drafted too widely can be harder to enforce, which helps nobody. A buyer usually gets better protection from a tighter covenant that clearly fits the business than from a sweeping one that a court might decline to uphold.

Where owners get caught out

The problems tend to come from the edges of the drafting rather than the headline promise:

• A definition of the restricted business that includes a side activity or a sister company you intended to keep.
• Covenants that restart or extend if you stay on as an employee or consultant after completion.
• Restrictions that also bind your family members or other companies you own, without that being discussed.
• Investment restrictions so broad that holding a few listed shares in a sector company would technically breach them.
• Separate covenants in your service agreement and the sale agreement that do not line up with each other.

None of these is unusual, and most are easy to fix if they are raised early. They become difficult when they surface in the last week before signing, when everyone is tired and nobody wants to reopen the document.

Think about your life after the sale

The best way to review a covenant is to picture what you actually plan to do once the deal completes. Do you want to mentor other founders, sit on a board, invest in a friend's company, or keep a small consultancy going? Do you own property or another business that touches the same customers? Will you keep working in the business for a period after completion?

Write those plans down and share them with your adviser before the drafting starts. Most buyers are happy to carve out specific, genuine activities that pose no threat to the business. They are far less comfortable when an owner asks for vague freedoms at the last minute.

Covenants and the people you leave behind

The non-solicit of employees can feel uncomfortable, especially if you have worked alongside some of the team for decades. It helps to see it from the other side. Your people are part of what you are passing on, and a buyer committing to keep them needs some confidence that the team will not follow you out of the door.

Staying in touch with former colleagues as friends is not the issue. The covenant is aimed at actively recruiting them away. If there is a particular person you hope to work with again, raise it openly rather than hoping the clause will not apply.

How we approach covenants as a buyer

As a long-term owner, we ask for covenants that protect the business and the team we are committing to, and no more. We would rather agree a clear, proportionate restriction at the start than argue over a sweeping one later. And we are glad to hear early about what you plan to do next, because a good handover depends on you leaving on terms you are comfortable with.

If you are thinking about a sale and want a private conversation about how covenants and the rest of the deal terms might look for a business like yours, a short call is enough to start. Nothing needs to leave that room, and there is no obligation either way.