Restrictive Covenants 101: Protecting Buyers from Bad-Faith Sellers

Restrictive Covenants 101: Protecting Buyers from Bad-Faith Sellers

Eric Pacifici and Kevin Henderson examine restrictive covenants in small business acquisitions on Main Street Deals. The discussion clarifies how business sale non-competes differ from employment agreements and why they remain enforceable even in restrictive jurisdictions like California. Kevin and Eric explain the legal frameworks governing covenant scope and duration, including state-specific rules on blue penciling versus red penciling, and why Florida presumes enforceability for non-competes lasting three to seven years. They discuss: - Why SBA lenders typically require minimum five-year non-competes and what seller pushback on duration signals about their intentions - How enforcement costs of $40,000 to $100,000 create practical barriers for leveraged buyers even when violations are clear-cut - Why covenant breaches should not be subject to damage caps since sellers maintain complete control over their actions - The function of employee and customer non-solicitation provisions and typical duration limits of six to 12 months - How non-disparagement clauses protect goodwill when seller relationships deteriorate after closing This episode clarifies the legal mechanics and practical enforcement challenges that determine whether restrictive covenants actually protect buyer investments in lower middle market transactions. (00:00:00) - Intro (00:01:25) - Firm update and deal volume (00:03:52) - What is a covenant? (00:06:32) - Business sale non-competes vs employment non-competes (00:09:03) - Scope and duration of non-competes (00:17:33) - Blue pencil vs red pencil states (00:24:02) - Carve-outs and exceptions to non-competes (00:25:40) - The practical challenge of enforcing non-competes (00:31:50) - Covenant damages and the purchase price cap (00:34:32) - Non-solicitation covenants (00:37:53) - Non-disparagement clauses (00:42:20) - Wrap-up Links: Eric Pacifici LinkedIn — https://www.linkedin.com/in/eric-b-pacifici/ [https://www.linkedin.com/in/eric-b-pacifici/] Twitter / X — https://x.com/ericpacifici [https://x.com/ericpacifici] Kevin Henderson LinkedIn — https://www.linkedin.com/in/kevin-l-henderson-sr-0050b39/ [https://www.linkedin.com/in/kevin-l-henderson-sr-0050b39/] Twitter / X — https://x.com/KHendersonCo [https://x.com/KHendersonCo] Companies: SMB Law Group — https://smblaw.group/ [https://smblaw.group/]

First 90 Days of Owning a Business: Why You Can't Avoid the J Curve

Sam Rosati and Kevin Henderson are joined by Kevin's wife Tara Henderson to discuss the realities of buying and operating a business as a married couple. Tara recently stepped into the full-time operator role at Supreme Wraps Dallas, a car wrapping franchise the couple acquired in January 2025. The conversation unpacks the challenges of transitioning from part-time work and raising three children to running a business in the automotive aftermarket space. They discuss: - How assumptions about management depth led to a steeper J-curve than expected - Why commercial vehicle wraps present margin and cultural challenges compared to luxury consumer work - The importance of understanding every financial detail before stepping into operations, even with experienced advisors - How partnered searches require both partners to deeply understand the financials, not just the lead buyer - Why physical location and manager retention mattered more than industry selection in their search This episode offers valuable lessons for anyone considering entrepreneurship through acquisition, particularly those evaluating a partnered or spousal search approach in the Main Street Deals space. Links: SMB Law Group - https://smblaw.group/ [https://smblaw.group/] Eric on LinkedIn - https://www.linkedin.com/in/eric-b-pacifici/ [https://www.linkedin.com/in/eric-b-pacifici/] Kevin on LinkedIn - https://www.linkedin.com/in/khendersonco/ [https://www.linkedin.com/in/khendersonco/] Sam on LinkedIn - https://www.linkedin.com/in/sam-rosati-68787a8/ [https://www.linkedin.com/in/sam-rosati-68787a8/]

Exploring the Most Common Mistakes First-Time SMB Buyers Make

Sam Rosati and Kevin Henderson explore common mistakes first-time small business buyers make during the search and acquisition process on this episode of Main Street Deals.  Drawing from their work with 10 to 30 active searchers at any given time, the co-founders of SMB Law Group share tactical lessons about search hygiene, deal team selection, and the timing decisions that can make or break a transaction. They discuss the importance of setting up proper legal infrastructure early, why certain NDA provisions should be negotiated carefully or avoided altogether, and how working capital miscalculations create post-closing cash flow crises that are nearly impossible to fix after the deal closes. They discuss: - Why signing NDAs and LOIs in your personal name creates unnecessary liability exposure - How trying to close two deals simultaneously or engaging multiple lenders in parallel destroys credibility with brokers and banks - The collateral assignment process for life insurance policies and why it adds weeks to closing timelines - Why searchers must address tax structuring and working capital requirements before signing an LOI, not after - How the 90 to 110-day average timeline from signed LOI to closing tests seller patience when delays emerge This episode offers practical guidance for searchers navigating their first acquisition, particularly those underestimating how early certain decisions must be made to avoid deal-killing surprises. SMB Law Group - https://smblaw.group/ [https://smblaw.group/] Evan on LinkedIn - https://www.linkedin.com/in/evan-thomson-327a78216/ [https://www.linkedin.com/in/evan-thomson-327a78216/] Eric on LinkedIn - https://www.linkedin.com/in/eric-b-pacifici/ [https://www.linkedin.com/in/eric-b-pacifici/] Kevin on LinkedIn - https://www.linkedin.com/in/khendersonco/ [https://www.linkedin.com/in/khendersonco/] Sam on LinkedIn - https://www.linkedin.com/in/sam-rosati-68787a8/ [https://www.linkedin.com/in/sam-rosati-68787a8/]

Lessons Learned from ETA and Building SMB Law Group

Eric Pacifici and Kevin Henderson reflect on four years of building SMB Law Group from scratch, using the anniversary as a lens to examine the realities of entrepreneurship through acquisition, lower middle market M&A, and operating a fast-growing law firm. The conversation blends personal reflection with tactical lessons from nearly 400 closed transactions, including how their views on diligence, lenders, sellers, and operational systems have evolved over time. They also unpack the hidden complexity inside small businesses, using a Bill Belichick analogy about NFL long snappers to explain why buyers often underestimate why businesses operate the way they do. Along the way, they discuss the role community support, technology, and process standardization played in scaling the firm nationally. They discuss: • The biggest lessons learned after four years and 379 closed M&A transactions • Why financial diligence remains the number one reason deals fail • How lender selection has evolved as the SBA and conventional lending market has matured • The dangers of underestimating operational complexity inside small businesses • Why sellers often become far more difficult as deals approach the finish line • The realities of buying “a job” versus building a scalable acquisition platform • How process documentation, SOPs, and operational discipline improved close rates • The role social media, technology, and community relationships played in building SMB Law Group This episode is valuable for acquisition entrepreneurs, operators, and anyone trying to build a business while navigating the realities of growth, complexity, and long-term execution. Links: SMB Law Group - https://smblaw.group/ [https://smblaw.group/] Evan on LinkedIn - https://www.linkedin.com/in/evan-thomson-327a78216/ [https://www.linkedin.com/in/evan-thomson-327a78216/] Eric on LinkedIn - https://www.linkedin.com/in/eric-b-pacifici/ [https://www.linkedin.com/in/eric-b-pacifici/] Kevin on LinkedIn - https://www.linkedin.com/in/khendersonco/ [https://www.linkedin.com/in/khendersonco/] Sam on LinkedIn - https://www.linkedin.com/in/sam-rosati-68787a8/ [https://www.linkedin.com/in/sam-rosati-68787a8/] Topics: (00:00:00) - Intro (00:01:09) - Reflecting on four years building SMB Law Group (00:05:11) - Deal stats breakdown (00:09:14) - Process wins and NPS (00:11:49) - Top ETA lessons list (00:12:43) - Financial diligence (00:15:43) - Lender choice rethinking (00:19:47) - Fundraising reality check (00:20:16) - Buying a job works (00:21:02) - BizBuySell and SBA loans (00:21:33) - Locking the deal early (00:22:06) - Diet PE and seller perception (00:22:41) - Online resources are real (00:23:05) - First deal momentum (00:23:58) - Lonely search and support (00:24:19) - Choose the right city (00:25:14) - Sellers aren’t stupid (00:28:16) - Four years building the firm (00:29:45) - Awards and innovation story (00:32:41) - Community thank you rollcall (00:37:16) - Mission and closing thoughts

Quality of Earnings and the Hidden Risks in Acquisitions

In this episode of Main Street Deals, Sam Rosati and Kevin Henderson break down the role of Quality of Earnings reports in small business acquisitions and why financial diligence can make or break a deal. They explain how Q of E reports help buyers validate a company’s financial reality, uncover hidden risks, and avoid dramatically overpaying for inflated or inaccurate earnings. The conversation walks through the mechanics of revenue testing, working capital analysis, cash proofs, and normalized EBITDA adjustments while also highlighting the limitations of Q of E reports in SMB transactions. Sam and Kevin also share real-world examples of deals where financial diligence uncovered major issues, forced renegotiations, or protected buyers from catastrophic mistakes. We discuss: * What a Quality of Earnings report actually is and how it differs from audited financials * Why inaccurate seller financials can dramatically inflate purchase price * How cash proofs and revenue testing uncover hidden financial issues * The most common EBITDA adjustments that lead to deal renegotiations * Why small business buyers should rarely skip financial diligence * The limitations of Q of E reports and the fraud risks they cannot fully eliminate * How working capital analysis impacts deal structure and purchase price * Why third-party diligence providers add psychological and negotiation leverage during acquisitions This episode is a practical guide for SMB buyers, investors, and operators who want to understand the real financial risks hiding inside acquisition deals. Links: SMB Law Group - https://smblaw.group/ [https://smblaw.group/] Evan on LinkedIn - https://www.linkedin.com/in/evan-thomson-327a78216/ [https://www.linkedin.com/in/evan-thomson-327a78216/] Eric on LinkedIn - https://www.linkedin.com/in/eric-b-pacifici/ [https://www.linkedin.com/in/eric-b-pacifici/] Kevin on LinkedIn - https://www.linkedin.com/in/khendersonco/ [https://www.linkedin.com/in/khendersonco/] Sam on LinkedIn - https://www.linkedin.com/in/sam-rosati-68787a8/ [https://www.linkedin.com/in/sam-rosati-68787a8/] Topics: (00:00:00) - Intro (00:01:11) - What is a QOE? (00:04:45) - Assurance vs audit (00:07:20) - Inside the workbook (00:09:25) - Restating the P&L (00:13:39) - Balance sheet working capital (00:15:05) - Cash proof testing (00:19:07) - Limitations and QOE lite (00:23:38) - Fraud risks and lender requirements (00:25:52) - Renegotiating after findings (00:37:28) - Who can skip QOE (00:40:30) - When QOE is better (00:42:41) - Wrap up and reviews