Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / The Most Dangerous M&A Clause Nobody Reads
Transcript
- Lucas: Every seller pore over the price and the payment terms, but there is one clause tucked into the boilerplate that can quietly destroy your career after the deal closes. It is the restrictive covenant definition, and most founders sign it without a second thought. Luna: The one that says you cannot compete with the buyer after the sale. That sounds straightforward, but it is anything but. Lucas: Exactly. The trap is not that you cannot work for a direct competitor — it is how the buyer defines what counts as competition. A single broad phrase can lock you out of your entire industry, not just your old company. Luna: Give me a concrete example. I want to see where the rubber meets the road. Lucas: Let us talk about a founder I know — call him Tom. He built a regional logistics company in the Midwest. Think last-mile delivery for e-commerce. In 2024 he sold to a national logistics conglomerate for around 40 million dollars. Luna: Nice exit. Then what? Lucas: The non-compete defined his restricted business as 'any business involved in the transportation, storage, or handling of goods.' That is almost everything in logistics. But the real kicker was a clause that said 'including any business that competes with the buyer or any of its affiliates.' Luna: So the buyer's affiliates — which he may not even know about — expand the scope infinitely. Lucas: Precisely. Six months after closing, Tom wanted to advise a small startup that did software for route optimization. No trucks, no warehouses. The buyer sent a cease and desist letter claiming the startup was an affiliate of a competitor they owned a minority stake in. Luna: Because the buyer had a tiny investment in a company that happened to overlap with the startup's space. Lucas: Right. Tom spent over 100,000 dollars in legal fees just to get a clarification letter that allowed him to do the advisory role. The buyer had all the leverage because he signed a broad definition. Luna: So what should a seller push back on? What are the levers? Lucas: Three things: geography, duration, and — most importantly — the definition of the restricted business. You want it to be as narrow as possible. Instead of 'any business involved in logistics,' write 'the specific business of last-mile parcel delivery within the continental United States.' Luna: That still covers your old company, but not everything adjacent to it. Lucas: Exactly. And for duration, most buyers push for three to five years. In many states, over two years is hard to enforce for non-competes tied to a sale. But you can negotiate it down to eighteen months and back it with a reasonable justification. Luna: What about the affiliate trap? That seems the sneakiest part. Lucas: That is the one sellers miss most. The clause often says 'you cannot compete with the buyer or any of its subsidiaries, affiliates, or related entities.' The buyer could acquire a new company the week after closing, and suddenly you are competing with that new company. You need to freeze the affiliate list to the entities existing at closing. Luna: So the list is attached to the agreement, and no future acquisitions expand your restriction. Lucas: Correct. And you also want a carve-out for passive investments — say you own less than five percent of a publicly traded company that competes. That should not trigger the non-compete. Luna: One thing I have seen in some deals is the buyer insisting on a 'non-solicit' that goes beyond customers to include employees and suppliers. But that is a separate clause. Lucas: It is, but it ties into the same philosophy. The restrictive covenant definition can also include non-solicit language. If it says you cannot solicit 'any person or entity that has a business relationship with the buyer,' that again is unlimited. You need it narrowed to specific categories you actually worked with. Luna: I think a lot of founders trust their lawyer when the lawyer says 'this is standard.' But standard for the buyer is not standard for the seller. Lucas: That is the core issue. The buyer's first draft is designed to maximize protection for them. If you sign it as-is, you are giving up future income opportunities you have not even imagined yet. I have seen founders who could not join a board, could not consult, could not even speak at conferences because the buyer deemed the conference topic competitive. Luna: What is the best way to catch this early? Before you are in the document review phase? Lucas: Bring it up during the letter of intent stage. The LOI usually mentions a non-compete term like 'two years,' but the definition is rarely spelled out. Ask the buyer to describe in plain English what businesses you will be barred from. Get it in writing, even if it is an email. That gives you leverage when the definitive agreement appears. Luna: And if they refuse to narrow it? What is your move? Lucas: You have to decide how important your future flexibility is. Some buyers will not budge because their whole thesis depends on removing you as a competitor. In that case, you may need to adjust the purchase price to compensate for the lost opportunity. Or walk. Luna: That is a hard conversation. But better to have it before closing than after. Lucas: Yeah. And on that note — quick honest thing. We keep this show completely ad-free. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that is what funds making this many episodes. If these conversations have moved your work forward in some small way, that is where you can help keep it going. Luna: It is true. Every bit helps us stay independent and dig into these specific traps you will not hear on the big finance shows. Lucas: Right. So back to Tom's story — after he got the clarification letter, he realized the broader lesson. The restrictive covenant definition is not boilerplate. It is a binding constraint on your career. Treat it like a contract term, not a formality. Luna: And if you are selling, bring this up with your lawyer before you sign anything. Ask them to redline the definition specifically. Lucas: Exactly. The price gets all the attention, but the post-close freedom is what lets you enjoy that price. Next time we will talk about a clause that can claw back your earnout if the buyer changes their accounting methods — the accounting principle trap. Luna: Looking forward to that one. Until then. Lucas: Take care.