Restrictive Covenants: The Post-Sale Restrictions on Your Commercial Freedom

The 30-Second Definition

Restrictive covenants are contractual obligations included in the Share Purchase Agreement that restrict the seller's commercial activities for a defined period after completion. They are the legal mechanism through which a buyer protects the value of the business they have acquired — preventing the seller from immediately competing with it, soliciting its customers, or approaching its employees. In UK mid-market M&A, restrictive covenants are standard, legally enforceable under English law, and frequently underestimated by founders who focus their negotiating energy on the financial terms of the SPA without scrutinising the post-completion restrictions that will govern their professional freedom for years afterward.

The Three Core Covenant Types

Non-Compete Obligations prevent the seller from carrying on, being employed by, investing in, or in any other way participating in a business that competes directly with the target company for a defined period following completion. 

The scope of the non-compete is defined by three variables: 

• the duration (typically two to five years), 

• the geographic territory (typically the UK, and in some cases specific international markets where the business operates), 

• and the business activities covered (typically the specific products, services, or market segments in which the target company operates).

Non-Solicitation Obligations prevent the seller from actively approaching the business's customers or prospective customers with a view to securing their business for a competing venture. 

The non-solicit is typically narrower in scope than the non-compete — it does not prevent the seller from operating a competing business altogether, but it prevents them from leveraging the customer relationships built during their ownership to divert business away from the company they have sold.

Non-Dealing Obligations go further than non-solicitation. A non-dealing clause prevents the seller from conducting business with former customers regardless of who initiated the contact — even if the customer approaches the seller proactively. Non-dealing obligations are more restrictive than non-solicitation and are more commonly sought by buyers in sectors where customer relationships are highly personal and where the founder's departure could trigger immediate revenue loss.

Non-Poaching Obligations prevent the seller from recruiting, inducing, or enticing employees of the acquired business to leave and join a competing venture. 

In a people-dependent business, the loss of key employees to a competing operation set up by the departing founder is one of the most direct threats to post-acquisition value — and buyers protect against it accordingly.

How Long Do Restrictive Covenants Last?

The duration of restrictive covenants in UK mid-market transactions typically runs from two to five years from the completion date, with the upper end more common in transactions where the buyer is paying for the founder's relationship network as a material component of the business's value.

English law does not set a statutory maximum duration for restrictive covenants in business sale contexts — the enforceability test is reasonableness relative to the legitimate business interest being protected. 

Courts distinguish between restrictive covenants in employment contracts, where the employee's bargaining power is typically limited and short durations are therefore required for enforceability, and restrictive covenants in business sales, where the seller is a sophisticated commercial party who has received substantial consideration and is deemed to have freely negotiated the restrictions accepted. 

In the business sale context, courts have enforced non-compete obligations of up to five years and, in exceptional cases, longer periods where the seller received significant consideration and the covenant was clearly negotiated.

The reasonableness test applies to three dimensions of the covenant: 

• duration, 

• geographic scope, 

• and the scope of restricted activities. 

A non-compete of five years covering the entire world for all commercial activities is unlikely to be enforceable. A non-compete of three years covering the UK for the specific sector and service lines of the target company, negotiated as part of a substantial transaction, has a strong prospect of enforcement.

Negotiating Carve-Outs Before Signing

The restrictive covenant schedule in the SPA is presented by the buyer's solicitors as a standard set of post-completion protections. In practice, every material element of the covenant is negotiable, and the carve-outs secured before signing determine whether the seller can operate commercially during the restriction period or is effectively frozen out of their sector.

The most important carve-outs to negotiate fall into three categories.

Passive investment carve-outs allow the seller to hold a minority shareholding — typically defined as below three to five percent — in a publicly listed company that competes with the target business, without breaching the non-compete. 

Without this carve-out, buying shares in any listed competitor through a personal investment portfolio could technically breach the covenant.

Pre-existing business interests allow the seller to continue operating or holding interests in businesses they owned before the transaction that were disclosed in the SPA. If the seller operates a complementary business that was not sold as part of the transaction, the covenant must explicitly carve out that activity or the seller faces a direct conflict between their SPA obligations and their continued commercial operations.

Scope limitations on the non-compete restrict the covenant to the specific activities actually carried on by the target business at the date of completion — preventing a buyer from using broadly drafted language to restrict the seller from entering adjacent markets that the target company was not in fact operating in. 

A software business selling HR tools should not be able to enforce a non-compete that prevents the founder from setting up a payroll business, unless payroll was genuinely part of the target's offering.

Geographic limitations should reflect the actual trading footprint of the target business. A business that operates exclusively in the UK with no international revenue should not be subject to a worldwide non-compete, regardless of a buyer's aspirations for future expansion.

The Consequences of Breach

Breach of a restrictive covenant in a business sale context is a serious matter. A buyer who can demonstrate that the seller is actively competing, soliciting customers, or poaching employees in breach of the covenants can apply to the court for an injunction restraining the seller from continuing the breaching activity, an order for an account of profits requiring the seller to disgorge any financial benefit derived from the breach, and damages representing the financial loss suffered by the acquired business as a result of the covenant breach.

Injunctions in covenant breach cases can be obtained on an emergency basis — meaning a buyer who discovers a breach can apply to court for urgent interim relief preventing the seller from continuing the activity before the full legal proceedings are resolved. 

The commercial disruption of being subject to an injunction, combined with the reputational and financial cost of litigation, makes covenant breach a genuinely high-risk course of action regardless of the legal arguments available.

The time to negotiate the covenant terms is before the SPA is signed, with specialist legal advice from solicitors experienced in business sale transactions. Post-completion disputes about covenant scope are expensive, uncertain, and damaging to all parties — outcomes that are entirely avoidable with proper legal preparation at the right stage of the process.

This entry is for general information only and does not constitute legal, financial, or tax advice. Founders should take specific professional advice before acting on any of the points covered here.