Restrictive covenants — what actually holds.

When a buyer acquires an agency, the thing they most need to keep — the producers and the clients they control — is exactly the thing most able to leave. Restrictive covenants are the legal shield against that, but the shield is only real if it would survive a challenge. A 10-year national non-compete reads strong and enforces like wet paper; a tightly-scoped non-solicitation reads modest and holds. Knowing the difference is the whole of this diligence.

§ 01 · Three covenant typesThree things they protect.

The three covenants protect different assets, and a complete shield uses all three. A non-compete is the broadest, barring a former employee from working in a competing business within a defined geography and duration — 3–5 years is the insurance-industry standard, and courts disfavor anything beyond seven. A non-solicitation is the precision tool: it doesn't restrict employment broadly, only the act of contacting or soliciting the agency's clients, which is why courts uphold it roughly 2–3× more often than a non-compete on equivalent facts. A non-piracy covenant protects the team — without one, a single departing manager can orchestrate five or more service staff to follow them out the door, and the non-piracy covenant makes that expensive or legally impossible.

§ 02 · The reasonable-scope testWhy narrower holds.

The reasonable-scope test is why the strong-looking covenant often fails and the modest one holds. A court asks whether the restriction is narrowly tailored to protect a legitimate business interest — and a broad ban on working in the entire industry, nationwide, for a decade, isn't protecting an interest so much as punishing the employee, so it gets narrowed or voided. The diligence implication is direct: a buyer reading the target's covenants should score each one on duration, geography, and activity scope, because a covenant that overreaches is functionally no covenant at all, and the revenue it was supposed to protect is actually at risk. The drafting craft that makes a covenant survive this test is covered in the legal-architecture treatment of restrictive covenants.

§ 03 · State enforceabilityWhere non-competes don't hold.

Enforceability is a function of jurisdiction as much as drafting, and a buyer who ignores the state can build a deal on a shield that doesn't exist. California and Minnesota effectively ban non-competes for employees — in a deal centered in those states, a buyer cannot rely on a non-compete as the shield and must reach for alternatives. A 2024 federal proposal would restrict non-competes across many industries, and its status remains unsettled, so a covenant strategy resting on long-term non-compete enforceability carries policy risk on top of state risk. Every other state varies, which means the right move is to check enforceability per state where the target actually operates, with counsel, rather than assuming a covenant signed in one state travels. The practical takeaway: in a non-compete-hostile state, the non-solicitation and non-piracy covenants — which protect specific assets without broadly restricting employability — do more of the real work.

§ 04 · The covenant-cure playbookFixing the gaps pre-close.

When an agency's covenants are missing or unenforceable, a buyer has a repeatable five-step cure to run before closing. First, audit the existing covenants — request every employment agreement and verify the scope, duration, and activity language actually holds. Second, identify the gap — which key staff lack a defensible covenant. Third, make the covenant cure a closing condition — the seller must obtain executed covenants from the gap-list employees before close. Fourth, tie a retention bonus to execution — a pay-for-signature mechanism, often $5K–$25K per producer, that aligns the producer's incentive with signing. Fifth, where covenants are impossible (a California or Minnesota deal), substitute alternative protection — vesting agreements, indemnification, or escrow. The cure converts an unprotected book from a reason to walk into a term to negotiate, and the rehire moment in an asset deal is the highest-leverage point to put it in place — which connects directly to talent retention.

◆