Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / How Bullet-Proof Non-Solicit Agreements Protect Deals
Transcript
- Lucas: Luna, I want to talk about a clause that most business owners don't think about until it's too late — the non-solicit agreement. And I've got a case that really shows why it matters. Luna: Okay, I'm in. Non-solicits are those promises that the seller won't poach employees after the deal closes, right? Lucas: Exactly. But the problem is, most of them are written so vaguely they're almost unenforceable. Let me set the scene. Last year, a mid-sized healthcare services company — about $40 million in revenue — got acquired by a regional hospital chain. The deal was structured as an asset purchase. The seller, a doctor who built the business over twenty years, stayed on as a consultant with a one-year non-compete and a standard non-solicit. Luna: Standard — meaning the boilerplate language from a template? Lucas: Right. The non-solicit said something like 'Seller shall not, for a period of two years, directly or indirectly, solicit any employees of the Company for the purpose of hiring them away.' Sounds solid on the surface. But here's what happened: Within four months of closing, three key account managers — who handled the largest client relationships — left to join a competitor that the seller had introduced them to. The hospital chain tried to enforce the non-solicit. Guess what happened in court? Luna: I'm guessing it didn't go well. Lucas: Not at all. The court ruled that the non-solicit was unenforceable because it didn't define 'solicit' clearly enough. The seller argued that he hadn't solicited — he just mentioned to the competitor that those employees were talented. The competitor did the actual recruiting. The judge agreed. The hospital chain lost roughly $6 million in expected synergies because those client relationships walked out the door. Luna: So a $6 million hole because of a poorly worded sentence. That's brutal. What would a bullet-proof non-solicit look like? Lucas: First, you define 'solicit' explicitly. Not just 'hiring away' but also 'encouraging, inducing, or influencing in any manner, whether directly or through third parties.' You also want to cover indirect solicitation — including the seller's affiliates, family members, or new business entities. And crucially, you define the solicitation period starting from closing, not from the signing date — that's a common mistake. Luna: Why does the start date matter so much? Lucas: Because if you sign the deal in January but don't close until June, and the non-solicit clock starts at signing, you've already lost six months of protection. In the healthcare case, the non-solicit started from the signing date — they lost half their coverage before the deal even funded. Luna: Wow. So that's a drafting detail that can cost millions. What else? Lucas: Second, you want a list. Attach a schedule of exactly which employees are covered — by name, title, and department. Don't rely on a generic reference to 'all employees.' Courts get very specific about who was actually intended to be protected. And third, include a liquidated damages provision. Spell out that if the seller breaches, they owe a specific amount — say, two times the annual compensation of any employee successfully solicited. That's a real deterrent. Luna: Liquidated damages — so the buyer doesn't have to prove actual damages in court, they just collect the set amount. That's smart. Lucas: Exactly. And it makes enforcement practical. Without it, the buyer has to hire a forensic accountant, prove lost synergies, and litigate for two years. Most buyers just give up. But non-solicits are also becoming more important because of the regulatory environment. You know the FTC's proposed rule to ban most non-competes? Luna: Right — that's been in flux for a while. The FTC issued the final rule in 2024, but it's been tied up in court challenges. As of June 2026, what's the status? Lucas: It's still not final. The Fifth Circuit Court of Appeals put a nationwide injunction on enforcement, and the FTC has appealed. Most deal lawyers I talk to are advising clients to plan as if non-competes could be significantly restricted within the next two years. That means non-solicits and non-disclosure agreements are becoming the primary tools for protecting deal value. Luna: So buyers are shifting their focus to non-solicits as a backup plan. Makes sense. Are there any other common mistakes you see? Lucas: One big one: failing to tie the non-solicit to consideration. Under most state laws, a non-solicit — like a non-compete — needs to be supported by separate consideration beyond just the employment or the sale itself. In an M&A context, that's usually the purchase price, but if the seller is also staying on as an employee, you need a separate agreement. I've seen deals where the seller signed a non-solicit in the asset purchase agreement but never got any additional payment for it — the court threw it out. Luna: What about the duration? Two years? Three years? Lucas: Courts generally look at reasonableness. For a business sale, one to two years is standard. Anything beyond three years starts to get challenged. But here's the trick: you can tie the duration to the compensation period. If the seller gets an earnout over three years, you can argue that the non-solicit should last as long as the earnout, because the buyer is still paying for the business. Luna: That's a clever connection. So the earnout period gives you a natural justification for a longer non-solicit. Lucas: Exactly. And that's what the good deal lawyers do — they build the non-solicit into the economic structure of the deal. Now, there's also a seller-side angle. If you're the seller, you want the non-solicit to be as narrow as possible. You might argue that it should only cover employees who are critical to the business — not the entire workforce. And you want to exclude employees who are terminated by the buyer or who leave voluntarily before the solicitation period begins. Luna: So it's a negotiation point. Both sides have leverage. What's the current market standard in middle-market deals? Lucas: I'd say a two-year non-solicit covering key employees — defined by job function or compensation threshold — is standard. Liquidated damages at one times annual compensation is common, but aggressive buyers push for two. And most deals now include a 'non-employment' clause — meaning the seller can't hire the covered employees as independent contractors or consultants either. Luna: That's important because the healthcare case you mentioned — the employees didn't get hired as employees, they went to a competitor. But the seller didn't hire them directly. The non-solicit should cover 'hiring, engaging, or retaining' in any capacity. Lucas: Right. And you want to cover not just solicitation but also 'assisting any third party in soliciting.' That's the indirect piece. One more thing: include a non-disparagement clause alongside the non-solicit. If the seller badmouths the company after the deal, that can cause key employees to leave even without active solicitation. Luna: So the non-solicit is really one part of a broader protection package. Non-compete, non-solicit, non-disclosure, non-disparagement. Lucas: Exactly. And each one needs to be drafted with the same level of specificity. I was talking to a deal lawyer last week who said that in 70 percent of the M&A contracts he reviews, the non-solicit is either unenforceable or so weak it's not worth the paper it's written on. That's a staggering number. Luna: Seventy percent? So most buyers are walking around thinking they're protected when they're not. Lucas: That's exactly the case. And it's fixable. You just have to spend the extra hour or two with your attorney to get the language right. If you're a buyer, don't accept the template from the seller's law firm. Have your own counsel draft the non-solicit. If you're a seller, push back on scope and duration. There's room to negotiate. Luna: Before we wrap up, I want to come back to something you said earlier — about liquidated damages. How do courts view those? Are they always enforceable? Lucas: Courts enforce liquidated damages if they're a reasonable estimate of actual damages at the time of contracting — not a penalty. If you set the amount at, say, ten times compensation, that's likely a penalty and won't hold up. But two times is generally considered reasonable, especially if you document the rationale — lost recruitment costs, training costs, lost revenue from client relationships. You want to put that analysis in the contract recitals. Luna: So the key is to show your work. Lay out why that number is reasonable. Lucas: Precisely. And if you're a seller, you can argue for a cap on total liquidated damages — say, a percentage of the purchase price. That way you're not exposed to an unlimited claim if multiple employees are solicited. Luna: Okay, so let's say I'm a business owner about to sell. What's the one piece of advice you'd give me about the non-solicit? Lucas: Don't let your lawyer use a template from their last transaction. Every business has different key employees. The definition of 'solicit' matters. The duration matters. The scope matters. And if you're the buyer, insist on a specific list of protected employees attached as a schedule. If you can't agree on a list during negotiations, you're not ready to close. Luna: That's a hard line. But I think it's right. If you can't agree on who's critical, you haven't done the diligence. Lucas: Look, if today's episode actually helped you think about your own deal more clearly, or even saved you from a costly mistake down the road, that's exactly why we do this show. And the way we keep these conversations ad-free and independent is through listener support — buy me a coffee dot com slash fexingo. If you've gotten value from episodes like this one, that's a simple way to keep it going. Luna: Yeah, it really makes a difference. We hear from listeners who say they've used something from a past episode in their actual negotiations. That's the whole point. Lucas: Absolutely. And I want to leave you with one more thought — a forward-looking one. With the FTC's non-compete rule still in legal limbo, I think we're going to see non-solicits become the central battlefield in M&A protection. If you're buying a business in 2026 or 2027, the strength of your non-solicit could determine whether you actually realize the value you paid for. Luna: So next time you're in the deal room, don't let the non-solicit be an afterthought. Spend the time to get it right. Lucas: Exactly. Thanks for listening, and we'll catch you next time.