Restrictive covenants — the moat that protects the buyer's investment, and the leverage that funds the seller's terms.

When a seller sells, the buyer is paying a premium for goodwill — reputation, client loyalty, and earning power built over years. Restrictive covenants formalize the seller's legal commitment to allow that goodwill to remain with the business sold. The sale-of-business exemption to broader regulatory limits (including the FTC ban discussed in the FTC non-compete update) preserves this category specifically because it is recognized as legitimate, bargained-for consideration.

§ 01 · The four covenant typesWhat each one protects.

Non-Compete. Prevents the seller from operating or working in a competing insurance business within a defined geographic area for a defined time period. Three key parameters: duration (typically 3–5 years), geography (tied to actual market served — counties, zip codes, or mileage radius; nationwide bans are rarely enforceable for local agencies), and scope (specific lines of business sold).

Non-Solicitation of Clients. Prevents the seller from actively soliciting former clients. Often broader in geographic scope than non-compete because it addresses a specific risk: the seller working outside the geographic radius but still calling old accounts. Typical duration: 3–5 years.

Non-Solicitation of Employees ("Non-Piracy"). Prevents the seller from hiring away former staff and producers. Team holds institutional knowledge and operational relationships. Typical duration: 2–3 years (shorter than client non-solicitation because team loyalty is typically shorter-lived than client relationships).

Non-Disparagement. Prevents negative statements about the business or buyer. Usually mutual. Often underutilized but valuable to negotiate.

§ 02 · The solicit-vs-accept loopholeThe most common practical failure.

A standard non-solicitation prohibits active outreach to former clients. But if a former client contacts the departing party independently, a standard non-solicit may not prevent acceptance of that business. This is the "they called me" loophole — and it's one of the most common ways restrictive covenants fail in practice. Departing producers passively signal availability (through LinkedIn updates, community presence, word of mouth) without technically soliciting, and then accept inbound business.

The fix is a Non-Acceptance Clause. Instead of restricting only active outreach, the non-acceptance clause prohibits the departing party from writing or servicing business for any former client of the agency, regardless of who initiated contact. The restriction shifts from the act of soliciting to the act of transacting — a much harder loophole to exploit.

Non-acceptance clauses have been upheld in M&A contexts where the seller received substantial consideration for the covenant. They are increasingly standard in well-drafted APAs.

§ 03 · Liquidated damagesThe enforcement mechanism that gives covenants teeth.

Standard non-piracy clauses need enforcement teeth. Proving "lost future revenue" in court is difficult and expensive. Liquidated damages solve the problem by pre-agreeing the financial penalty for breach.

The mechanism: if the seller solicits or accepts a former client in violation of the covenant, they owe a penalty equal to a multiple of the annual commissions generated by that client. The standard benchmark is 150% of annual commissions per breached client (sometimes 1.5–2× depending on industry).

Why 150% works: it creates a mathematical disincentive for poaching. A client generating $10K in annual commissions costs the departing party $15K to breach. Stealing the client becomes more expensive than profitable. Liquidated damages convert poaching from a business opportunity into a financial loss.

§ 04 · The PPA tax connectionHow non-compete allocation interacts with seller tax.

The non-compete covenant is more than a legal restriction — it is a Class V (or Class VI) intangible in the IRS asset-class hierarchy, subject to PPA allocation. The buyer wants high allocation (15-year amortization deductions). The seller wants low allocation (ordinary-income tax treatment vs. capital gains for goodwill).

The strategic interaction: a seller who accepts higher non-compete allocation should extract corresponding concessions on holdback, earnout, or other terms. The buyer's preference for high non-compete allocation is leverage.

§ 05 · Enforceability and the FTC questionWhat survives, what doesn't.

Enforceability varies by state. California voids most non-competes; Texas and Florida enforce them broadly. The FTC's 2024 non-compete ban (covered in detail in the FTC non-compete update) targeted broad employment non-competes but preserved the sale-of-business exemption — meaning seller non-competes in agency M&A remain enforceable regardless of the ban's status.

The forward-looking insight: non-solicitation, non-piracy, non-disclosure, and liquidated-damages clauses are not subject to the FTC ban. They are the survival layer. Well-drafted agency M&A documentation increasingly emphasizes this stack — leaning on these covenants rather than relying on broad non-competes alone.

§ 06 · The "Stability Premium" signalHow covenant infrastructure reads to buyers.

A seller with a comprehensive restrictive-covenant infrastructure — non-compete plus non-solicitation plus non-piracy plus liquidated damages — signals operational maturity. Buyers conducting diligence look for it. Per the readiness model, the signal helps pull the offer toward the upper edge of whatever readiness band the agency qualifies for. Missing covenants pull toward the lower edge.

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