Non-Solicitation Agreements in M&A: The Post-Close Restriction Founders Underestimate

When founders think about post-close restrictions, they think about non-competes — the prohibition on starting or joining a competing business. Non-competes receive extensive negotiation attention because their impact on the founder's future career and business activity is direct and obvious.

Non-solicitation agreements receive less attention and are more frequently signed without careful analysis. They are shorter, less dramatic-sounding, and often buried in the same section of the purchase agreement as the non-compete. But the restrictions they impose — on the founder's ability to hire former colleagues and work with former customers — can have material consequences for any venture the founder pursues after the sale.

Employee non-solicitation: what it prohibits and how it is triggered

Employee non-solicitation provisions prohibit the selling founder from soliciting, inducing, recruiting, or hiring employees of the business (or, in some drafts, former employees) for a defined period after closing. The scope of the restriction depends on three variables: the definition of "solicit," the definition of covered employees, and the duration.

"Solicit" is defined more broadly in most purchase agreements than founders assume. The baseline definition prohibits direct job offers. A more seller-friendly definition limits the restriction to active recruitment efforts directed at the individual. A more buyer-friendly definition covers any communication that could reasonably be interpreted as encouraging the employee to consider leaving — which is broad enough to include a coffee conversation where the founder mentions they are starting something new.

Covered employees in a well-drafted provision are defined as employees of the acquired business as of the closing date, or as of any date within 12–24 months before closing. This lookback period matters: it prevents the buyer from arguing that an employee who left before the sale is still covered, while ensuring that employees who departed in the normal course shortly before closing are not immediately available for recruitment.

The buyer-initiated termination carve-out is the most important employee non-solicitation negotiation point for sellers who plan to start a new venture. Buyers frequently restructure the acquired workforce in the months after closing — reducing headcount, eliminating roles, or changing compensation structures. Employees who are laid off by the buyer post-close may be exactly the people the founder would want to work with in a new venture. Without a carve-out, the non-solicitation prohibits hiring them for the full restricted period even though the buyer severed the employment relationship.

Customer non-solicitation: scope, duration, and the carve-out negotiation

Customer non-solicitation provisions prohibit the selling founder from soliciting, diverting, or accepting business from customers of the acquired business for a defined period after closing. The central negotiation questions are: which customers are covered, what conduct is prohibited, and for how long.

Customer coverage is typically defined by a lookback period: customers who were active in the 12 or 24 months preceding the closing date are covered. The seller's negotiating interest is a shorter lookback (12 months) that excludes lapsed or inactive relationships. The buyer's interest is a longer lookback (24 months) that covers any customer with a recent relationship, even if they did not purchase in the period immediately before closing.

"Solicit" in a customer non-solicitation context typically means any affirmative effort to divert the customer's business from the acquired entity. It does not, in most well-drafted provisions, prohibit the customer from independently seeking out the founder and initiating a business relationship. The distinction between the founder soliciting and the customer reaching out matters practically and should be explicit in the agreement.

How non-solicitation interacts with the FTC non-compete landscape

The FTC's 2024 rule banning most non-compete agreements included a bona fide sale of business exception: non-competes entered into in connection with the sale of a business are exempt from the rule, provided the seller has a substantial ownership interest in the business being sold.

Non-solicitation provisions are analytically distinct from non-competes and are generally not affected by the FTC rule. A non-solicitation is not a prohibition on competing — it is a prohibition on specific recruitment and customer contact conduct. The FTC rule's non-compete analysis does not reach non-solicitation restrictions.

State law governs the enforceability of both non-competes and non-solicitation provisions in M&A transactions. States vary significantly in their treatment of both. California, for example, broadly limits non-competes but has historically treated M&A sale-of-business non-competes differently from employment non-competes. The applicable state law — determined by the governing law provision in the purchase agreement — determines what is enforceable and what is not.

The practical implication for LMM sellers: negotiate the non-solicitation language carefully on its own terms, independent of any assumption about the non-compete landscape. A non-solicitation that is appropriately scoped and carve-outed protects the founder regardless of what happens to the non-compete regulatory environment.

Enforcement: how violations are discovered and what they cost

Non-solicitation violations are discovered through employee and customer relationships, not through surveillance. The most common discovery mechanism is an employee who tells their new manager that the founder reached out, or a customer who mentions that they received an inquiry from the former owner.

Buyers who discover a non-solicitation violation have two main enforcement options. The first is an injunction — a court order prohibiting the founder from continuing the violating conduct. Injunctions are sought when the harm is ongoing and the buyer has a legitimate business interest in stopping it. The second is an indemnification claim under the purchase agreement. If the SPA includes a specific indemnification provision tied to breach of the non-solicitation covenant, the buyer can claim damages from the escrow or directly against the seller.

The practical cost of a non-solicitation violation is rarely litigation — litigation is expensive, time-consuming, and uncertain for both parties. It is escrow exposure. If the purchase price included a 10% escrow held for 18 months, and the buyer brings a non-solicitation indemnification claim before the escrow releases, the founder faces the choice between contesting the claim (extending the escrow dispute) or settling for a partial release. Most founders settle. The settlement is the real cost.

The negotiation: what to push for and what to accept

Non-solicitation negotiation is most effective when conducted as part of the overall restrictive covenant package — non-compete scope, non-solicitation scope, and duration — rather than as isolated provisions. Buyers who are willing to narrow the non-compete geographic scope may be less willing to narrow the non-solicitation duration, and vice versa. Understanding the buyer's priorities allows the seller to make trades that protect the restrictions they care most about.