Understanding covenant restrictions after a law firm sale and why they matter

When a law firm changes hands, the transition isn’t just about who signs the dotted line. It’s also about what stays put to protect clients, the new ownership, and the value of the business itself. One of the most talked-about elements in these deals is the covenant restriction that often follows a sale. Put simply: the new owners want to limit what the former owners can do next, especially when it comes to competing for clients. So, what does that look like in real life?

What is a covenant restriction, and why does it show up after a sale?

Think of a covenant restriction as a contract term designed to keep the total package—the client relationships, the goodwill, the systems—stable after a change in ownership. In many deals, the seller agrees not to engage in activities that would directly compete with the new owners for a defined period and within a defined geography. The aim isn’t to punish anyone; it’s to protect the value that both sides have built together.

Here’s the thing: clients often stay with a firm because they trust the people, the processes, and the familiarity of working with the same team. If the seller immediately opens a new, competing shop nearby or swoops in to take over those clients, the new owners could face a real disruption in revenue and continuity. A covenant helps prevent that disruption while the dust settles.

The correct focus: restriction on competition with the new owners

A common multiple-choice takeaway you’ll encounter is this: after a sale, the covenant typically restricts competition with the new owners. In plain terms, that means the seller shouldn’t open a rival firm nearby or actively solicit the firm’s former clients for a set period. It’s not about punishing anyone; it’s about preserving stability so clients aren’t bounced around and the new owners can operate without immediate, direct threats to their client base.

Why this matters ethically and practically

From an ethics standpoint, the promise not to take or poach clients helps protect the client’s interests. Clients should be served consistently, not as pawns in a tug-of-war between sellers and new owners. The covenant helps ensure continuing service quality and reduces the risk of abrupt client turnover.

From a business angle, think about goodwill—the value attached to a well-known client roster and trusted relationships. If a departing group could immediately start competing for the same clients, the new owners might struggle to maintain the same level of service while they’re still investing in brand building, technology, and staff. The restriction is a practical breath of stability during a potentially turbulent transition.

What other options are not typically the focus of these covenants?

• Increasing client fees after the sale: This isn’t usually the point of a covenant. Fee policies can be a separate agreement or separate negotiation and are less about keeping competition at bay.

• Allowing the former team to represent former clients freely: That would undercut the whole purpose of the deal’s protection period. The point is to prevent direct competition, not to facilitate a renewed, unrestrained client handoff.

• Unlimited sharing of firm strategies: Confidential information is protected, yes, but a covenant that allows rampant sharing of strategies would defeat the purpose of safeguarding client relationships and the new owners’ investment.

In short, the core function is to avoid a clash of interests that could shake client loyalty and the deal’s value. It’s about keeping the playing field fair for a defined stretch of time.

A quick note on the ethics rules behind this

In the ethics world, you’ll come across rules about restraints after a professional relationship ends. The general idea is simple: broad post-relationship restraints aren’t desirable because they risk limiting a lawyer’s ability to serve clients. However, there is room for narrowly tailored provisions when they’re tied to the sale of a firm or a substantial part of it. The key limits are reasonableness in scope (how long, how far, and what precisely is restricted) and ensuring client interests aren’t compromised by the restriction.

So, what does “reasonableness” look like in practice? Usually, you’ll see:

• Time: the restriction lasts a defined, finite period (for example, one to three years). It’s short enough to be fair but long enough to protect the investment.

• Geography: the restriction covers a reasonable geographic area, often aligned with where the bulk of clients are located or where the buyers have market exposure.

• Scope: the restriction targets specific lines of business or client segments, rather than every possible form of service.

A helpful analogy: think of it like a temporary no-snooze zone after a major project handover. You don’t want to stop all collaboration forever, but you do want a smooth transition so the new team can stand on solid ground before exploring their own path.

What does this mean for the people involved?

• For the seller: yes, there’s a constraint, but it’s usually framed as a finite chapter rather than a binding sentence. The seller still has room to work, just not in ways that would immediately undermine the new owners.

• For the new owners: this is a shield against nitty-gritty, rapid-client shifts that could destabilize the business. It buys time to implement client retention strategies, onboarding processes, and the long view for growth.

• For clients: the goal is consistency. Clients keep receiving the same level of service, from the same people, in the near term, while the transition unfolds.

Real-world flavor: a simple scenario

Imagine a medium-sized firm with a loyal client base. The firm sells to a bigger organization that has a strong presence in one city and plans to expand. The covenant might say: for two years, the former owners may not open a competing firm within a 50-mile radius or solicit clients who were active with the firm in the last year. This feels fair because it protects the new owners’ immediate investments—team members, office space, technology—while the deal remains fresh. At the same time, it doesn’t erase the former owners’ ability to work in the field altogether or to serve clients they didn’t have a connection with before.

Connecting the dots: how this topic fits into the bigger ethics picture

Covenants that restrict competition after a sale bridge two core concerns in professional responsibility: protecting client interests and safeguarding the integrity of the legal market. They also touch on confidentiality, conflict management, and the responsible handling of goodwill. It’s not just a “get the deal done” moment; it’s a moment that asks: What’s fair to clients, what’s fair to the business, and what preserves the profession’s trust?

A few practical takeaways to keep in mind

• Clarity matters: covenants should spell out who’s restricted, for how long, and in which locations or client segments.

• Balance is essential: the restriction should protect the deal’s value without unduly limiting a lawyer’s future opportunities.

• Governance plays a role: many firms back the covenant with transitional processes—introductions, overlap arrangements, and careful client communications to avoid abrupt changes.

• Confidentiality stays front and center: even as the deal closes, protecting client information remains a priority.

A dash of reflection: what’s tempting to overlook?

It’s tempting to focus on numbers and signatures, but the ethical heartbeat lies in protecting clients’ interests and ensuring a fair, stable transition. When you hear terms like “restriction on competition,” pause for a moment and think: What does this mean for the clients, the people who rely on the firm for steady, trusted service? That perspective helps translate dry contract language into the lived experience of the people the deal touches.

If you’re parsing these topics for the first time, here’s a simple mental checklist

• Is the restriction framed to prevent direct competition with the new owners?

• Does the time frame feel reasonable for a smooth transition?

• Is the geographic scope appropriate for where clients are located?

• Are there clear allowances for ongoing relationships with existing clients, subject to fair boundaries?

Bringing it home

A covenant restriction following a sale of a law firm is fundamentally about stability. It’s a carefully crafted clause that aims to protect client relationships and the new owners’ investment while still leaving room for the professionals involved to move forward in a fair, ethical way. The reason this topic surfaces so often isn’t glamorous or dramatic; it’s practical and essential. It’s about making sure the transition doesn’t interrupt trust, service quality, or the livelihoods that depend on both the old and new teams.

If this topic sparks questions or you’re pondering the nuances of how a similar clause would play out in a real-life scenario, you’re in good company. The ethics rules aren’t just about black-and-white prohibitions; they’re about guiding behavior in the gray areas where business needs, client welfare, and professional responsibility intersect.

Bottom line

When a law firm changes hands, the covenant restriction is usually a restraint on competition with the new owners. It’s a targeted, time-bound, geography-aware provision designed to protect clients and preserve value during a vulnerable window. Other potential clauses—like fee changes or unrestricted client representation—don’t fit this purpose as neatly. So the next time you see a deal clause like this, you’ll know what it’s really about: a careful balance that helps everyone move forward with confidence.