Who pays for prepaid orders, refunds and chargebacks after closing?
Between buyer and seller, the agreement can allocate responsibility for customer prepayments, refunds and chargebacks that straddle closing, as one filed agreement did by requiring the buyer to serve customers whose deferred revenue the seller had already received.
Customers' own rights are a separate question that the buyer-seller allocation does not settle; under California law, for example, the burden of an obligation may be transferred with the consent of the party entitled to its benefit, but not otherwise, except as provided in Section 1466 of the Civil Code.
For a software-as-a-service business, prepaid annual subscriptions are the common case, and Barlow & Williams describe customers on pre-existing annual subscriptions as customers who need to be served but who will generate no revenue until their subscription renews. Any resulting price deduction is negotiated and can depend on the number and age of subscriptions, churn and the share of customers on annual subscriptions. A schedule can list the prepaid obligations the buyer takes on: one filed website asset purchase agreement had the buyer assume the liability to fulfill job listings and subscriptions sold before closing, all set forth on a schedule, including refunds to subscribers who cancel. Responsibility can instead follow the date of the underlying sale: another filed agreement required the selling parties to reimburse the buyer for customer refund claims on products sold before closing, with the buyer bearing the first $10,000 in total. For gift cards and store credit, Gregory Kovsky lists a price reduction, a cash payment from the seller, reimbursement of redemptions over time and offset against a seller note as options, and one filed e-commerce agreement reduced its deferred payment by outstanding gift cards.
Vouchers issued before closing and redeemed after it raise the same question: in one filed ski-resort stock purchase agreement, the buyer agreed to cause the acquired companies to honor American Skiing Company's obligations under gift cards, rewards coupons and discount vouchers issued before closing, and American Skiing Company agreed to reimburse the buyer for those redeemed at the resorts after closing. The same agreement required each side to give the other access to its systems to track the usage of those cards, tickets and passes.
The agreement also needs a general cutoff for receipts: one filed agreement left the seller owning receivables for goods sold and services rendered before closing, and required each side to turn over payments it received that belonged to the other. Shared expenses can be prorated: another filed agreement prorated taxes, utilities, rents and similar charges benefiting both parties at closing, based on the actual number of days of pre-closing and post-closing use.
Sources for this answer
The Internet-services agreement supports an express buyer obligation to serve customers whose deferred revenue the seller already received.
The Buyer shall assume and discharge the obligation to provide Internet Services to the Customers who have paid the Deferred Revenue to Seller.
See Section III.E, Assumption of Liabilities
Gregory Kovsky lists options for allocating gift-card liability, including a price reduction, a cash buyout, reimbursement over time and offset against a seller note.
A few of the available options include a price reduction of the business for assumption of the liability, delivery of cash to buy out the liability by the seller to the purchaser, a mechanism for the seller to reimburse the buyer for redemptions over a period of time, offset credits against a seller promissory note, or a variety of other solutions.
See Gregory Kovsky, Gift Cards, Store Credits & Vendor Refunds in a Business Purchase/Sale Transaction, IBA Business Brokers (July 19, 2022).
The iGourmet agreement reduced its post-closing payment by outstanding gift cards.
(c) The Post-Closing Payment shall be reduced by the sum of all outstanding gift cards issued since December 1, 2023.
See §1.04(c); agreement dated Aug. 30, 2024
The Mount Snow agreement required the buyer to cause the acquired companies to honor American Skiing Company's obligations under gift cards, rewards coupons and discount vouchers issued before closing, with American Skiing Company reimbursing the buyer for those redeemed at the resorts after closing.
The Buyer agrees to cause the Companies to honor ASC’s obligations under gift cards, Peaks Rewards Coupons and Mobil discount vouchers or coupons issued prior to the Closing, and ASC will regularly and promptly reimburse the Buyer for ASC issued gift cards, Peaks Rewards Coupons and Mobil discount vouchers or coupons to the extent redeemed at the Resorts after the Closing.
See §9.5(g)
The Mount Snow agreement required each side to give the others access to its systems to track the usage of the cards, tickets and passes.
Each of ASC and the Companies will provide access to their respective systems to the other parties to enable them to track the usage of such cards, tickets and passes.
See §9.5(g)
Under California law, the burden of an obligation may be transferred with the consent of the party entitled to its benefit, but not otherwise, except as provided by Civil Code § 1466.
The burden of an obligation may be transferred with the consent of the party entitled to its benefit, but not otherwise, except as provided by Section 1466.
See Cal. Civ. Code § 1457.
Barlow & Williams describe customers on pre-existing annual subscriptions as customers the buyer must serve who generate no revenue until renewal.
From the buyer’s perspective, people on pre-existing annual subscriptions are customers who need to be served but who will generate no revenue until their subscription renews.
See Barlow & Williams, Purchase Price Adjustments (May 17, 2024).
Barlow & Williams explain that a price deduction for prepaid subscriptions is negotiated and can depend on the number and age of subscriptions, churn and the share of customers on annual subscriptions.
The amount of any deduction will be negotiated and could depend based on factors such as the number and age of subscriptions, churn or melt rate, and the percentage of customers on annual subscriptions.
See Barlow & Williams, Purchase Price Adjustments (May 17, 2024).
The Salem agreement's assumed liabilities included fulfilling job listings and subscriptions sold before closing, all set forth on a schedule, including refunds to subscribers who cancel.
The Assumed Liabilities include the liability to fulfill contracts for all job listings and subscriptions to products and services on the Websites sold by Seller prior to the Closing Date, all of which liabilities are set forth on Schedule 1.3(a) (such liabilities, the “Fulfillment Liability”), including the liability to pay refunds to any subscribers who cancel (for whatever reason) their subscriptions to any of the Website’s products and services sold by Seller.
See §1.3(a)
The Grove agreement required the selling parties to reimburse the buyer for customer refund claims on products sold before closing, with the buyer responsible for the first $10,000 in the aggregate.
With respect to sales of Products made prior to Closing, Selling Parties will promptly reimburse Buyer in immediately available funds within ten (10) days of delivery of written notice from Buyer for any claims for refunds by Customers that are authorized by Seller or are in accordance with the agreements with the applicable Customer (even if not authorized by Seller); provided, however, that Buyer shall be responsible for the first $10,000 in the aggregate of those refunds (i.e., Buyer shall not charge Selling Parties for those until the sum of payments and costs exceeds $10,000).
See §6.6
The Salem agreement left the seller owning receivables for goods sold and services rendered before closing and required each party to turn over to the other payments it received that belonged to the other.
Buyer acknowledges that Seller is retaining ownership of all accounts receivable of the Business for goods sold and services rendered by Seller prior to the Closing Date and that such accounts receivable are Excluded Assets (the “Seller Accounts Receivable”). From and after the Closing Date, Seller shall be permitted to contact account debtors with respect to any of the Seller Accounts Receivable for purposes of collection thereof and to instruct account debtors to remit payments for the Seller Accounts Receivable directly to Seller. Buyer shall promptly remit, turnover and endorse to Seller any payments representing Seller Accounts Receivable received by Buyer after the Closing Date. From and after the Closing Seller shall promptly remit, turnover and endorse to Buyer any payments representing accounts receivable arising from the sale of goods or services by the Business after the Closing Date.
See §8.4
The Sitestar agreement prorated taxes, utilities, rents and similar charges benefiting both parties at closing, based on the actual number of days of pre-closing and post-closing use.
Any real estate, personal property, and other taxes, utilities, rents, charges, license charges and other assessments that inure to the benefit of both Seller and Buyer, if any, shall be prorated at the Closing between Seller and Buyer based on the actual number of days applicable to pre-Closing and post-Closing use.
See §4.4; agreement dated Feb. 28, 2007
What post-closing assistance should the agreement cover?
A purchase agreement can define the assistance each side owes after closing, as one filed purchase agreement did by requiring the parties to provide the broker, on request, all information needed to facilitate its migration process.
Training or knowledge transfer is broader than that kind of obligation and needs its own agreed scope; one filed agreement, for example, required the seller after closing to use best efforts to document and explain the acquired know-how so the buyer could use it without relying on the owner's memory. A transition schedule can identify tasks, the people who will perform them, weekly hours, duration, compensation, expenses, access and a completion standard; Venn Law Group describes duration, weekly hours and compensation as the terms that give a transition its structure. For an online business, useful tasks can include deployment and codebase walkthroughs and help with provider and customer-account transfers; one filed online-service agreement required the seller, during a transition period, to give the assistance reasonably required to transfer customer accounts and their billing, for no more than 90 days. Relationship handover can also be written in, and one filed agreement required the sellers after closing to refer all customer, vendor and supplier inquiries about the business to the buyer.
The agreement can separate cooperation needed to complete the agreed transfer, often called further assurances, from continuing support or operation of the business; in one filed agreement, further assurances meant executing further instruments and taking actions reasonably requested to effect, confirm or evidence the transfer of the purchased assets. It can also state what happens when requested work exceeds the agreed scope, and Venn Law Group notes that an extension of the transition term may require renegotiating its terms. A seller who keeps working in the business under an employment or consulting agreement is addressed under when the covenant is signed. Practice varies on both length and pay; Venn Law Group describes transition agreements typically running three to twelve months, with sellers usually paid hourly or monthly, while Jacob Orosz observes that a set training period is commonly included in the price, with hourly consulting afterward. A written buyer acknowledgment that the agreed training is complete closes the obligation and avoids a later dispute about it.
Sources for this answer
The Jeffs Brands agreement supports an express information obligation for its migration process.
The Parties agree to provide Broker all necessary information upon request to facilitate the Migration Process.
See Migration Process, paragraph (e)
Venn Law Group describes transition agreements typically running three to twelve months, longer for complex businesses.
The term, or duration, of a transition agreement is a fundamental element typically ranging from three to twelve months, although it can extend longer if the business is more complex.
See Venn Law Group, Transition Consulting Agreements (Nov. 27, 2024).
Venn Law Group observes that sellers are usually paid hourly or monthly for transition services.
In exchange for their time and expertise, the seller is usually compensated on an hourly or fixed monthly basis.
See Venn Law Group, Transition Consulting Agreements (Nov. 27, 2024).
Jacob Orosz observes that a set training period is commonly included in the price, with hourly consulting available afterward.
It’s common to include a set training period in the purchase price and for the seller to offer an ongoing consulting agreement on an hourly basis if the buyer needs help beyond the formal training period.
See Jacob Orosz, Transition Period, Morgan & Westfield (July 31, 2021).
The Sitestar agreement limited seller transition assistance to a period not exceeding 90 days.
During the transition period, which shall not exceed 90 days, Seller shall provide to Buyer such assistance as is reasonably required to provide for the transfer of customer accounts and the billing of such accounts.
See §2.4; agreement dated Feb. 28, 2007
Jacob Orosz recommends a written buyer acknowledgment that the training period is complete so there are no disputes.
Upon completion of the training period, it’s important to have the buyer acknowledge in writing that the training period has been completed so there are no disputes.
See Jacob Orosz, Transition Period, Morgan & Westfield (July 31, 2021).
The Bankrate agreement required the owner and seller after closing to use best efforts to document and explain the acquired trade secrets, know-how and other intellectual property so the buyer could use it without relying on the owner's special knowledge or memory.
Without limiting the generality of Section 7.7(b), after the Closing, each of Owner and Seller agrees that he or it shall use best efforts to promptly take all such actions as may be requested by Buyer from time to time to cause all trade secrets, know-how and other Intellectual Property included in the Purchased Assets to (i) be sufficiently documented to allow its full and proper use without reliance on the special knowledge or memory of Owner or any other Person and (ii) be sufficiently explained and demonstrated to such Persons as the Buyer may direct to allow its full and proper use without reliance on the special knowledge or memory of Owner or any other Person.
See §7.7(b)
The Bankrate agreement required the seller parties after closing to refer all customer, vendor and supplier inquiries about the business to the buyer.
Seller Parties agree that subsequent to the Closing they shall refer all inquiries from customers, vendors or suppliers with respect to the Business to Buyer.
See §7.7(a)
The Bankrate further-assurances clause required each party to execute further instruments and take additional action reasonably requested to effect, consummate, confirm or evidence the transfer of the purchased assets.
Each of the Parties shall execute and deliver such further instruments of conveyance and transfer and take such additional action as the other may reasonably request to effect, consummate, confirm or evidence the transfer to Buyer of the Purchased Assets, the assumption by Buyer of the Assumed Liabilities and the conduct by Buyer of the Business, and shall execute such documents as may be necessary to assist Buyer in preserving or perfecting its rights in the Purchased Assets and its ability to conduct the Business.
See §7.7(a)
Venn Law Group describes terms for transition duration, weekly hours and compensation as giving the seller's knowledge transfer a structured approach.
By setting terms for the transition duration, weekly hours, and clear compensation, transition agreements provide a structured approach for the seller to share essential knowledge while helping the buyer feel prepared to take over.
See Venn Law Group, Transition Consulting Agreements (Nov. 27, 2024).
Venn Law Group notes that a transition term may provide for extension by agreement, which may require renegotiating terms.
In many cases, the term may include provisions for extension if both parties agree that additional support from the seller is necessary, although such extensions may require renegotiation of terms.
See Venn Law Group, Transition Consulting Agreements (Nov. 27, 2024).
How should a seller non-compete be tailored to the business being sold?
Under Delaware law, a seller non-compete can be tailored by limiting its restricted activities and geography to what protects the buyer's legitimate economic interests, because Kodiak Building Partners v. Adams rejected sale covenants broader than that despite applying a less searching inquiry to them than to employment covenants. On a touch screen, a tap shows all 2 sources in this group.
California, which voids most non-competes, has a statutory exception for sales: a person who sells the goodwill of a business, and an owner of a business entity that sells all or substantially all of its operating assets together with its goodwill, may agree with the buyer not to carry on a similar business within a specified area where the business was carried on, so long as the buyer carries on a like business there.
The covenant's scope is a set of separate choices about the restricted business, the territory or customers, the duration and the persons bound, and Delaware courts review a non-compete for reasonable geographic scope and duration, a legitimate economic interest and a balancing of the equities. As a drafting suggestion for an online business whose customers are not tied to a place, the restricted business can be defined by the products, customers or channels actually sold rather than by a map, since the Kodiak court, quoting earlier authority, measured a covenant's scope by the area in which the buyer has an interest to protect rather than by physical distance; whether a court accepts that definition is a question for the governing state's law. Non-competition, customer and employee non-solicitation, confidentiality and non-disparagement regulate different conduct and are not interchangeable; one filed agreement, for example, set out non-solicitation of customers, suppliers and employees and non-disparagement as covenants separate from its non-compete. An amount allocated to a covenant not to compete entered into in connection with acquiring a business is a section 197 intangible, which the buyer amortizes over 15 years, as the purchase-price allocation question explains. A seller who will also work for the buyer may sign an employment or consulting agreement whose covenants are judged under employment rules; California, for example, voids a noncompete clause in an employment contract that does not satisfy a statutory exception, and the timing and placement of those documents are covered under when the covenant is signed.
The FTC's non-compete rule is no longer on the books; the FTC removed its Non-Compete Clause Rule from the Code of Federal Regulations in a final rule published February 12, 2026. State law therefore supplies the main limits, and they differ; California voids contracts restraining anyone from a lawful business except as its statutes provide, while Delaware reviews a non-compete for reasonableness. The state guides linked from the restrictive covenants guide address those rules.
Sources for this answer
The Delaware Court of Chancery stated that covenants not to compete in a business sale receive a less searching inquiry than employment covenants.
Generally, covenants not to compete in the context of a business sale are subject to a “less searching” inquiry than if the covenant “had been contained in an employment contract.”
See Kodiak Building Partners, LLC v. Adams, C.A. No. 2022-0311-MTZ (Del. Ch. Oct. 6, 2022).
The Delaware Chancery Court rejected the challenged geographic and activity scope as broader than needed to protect the buyer’s legitimate interests.
The RCA’s noncompetition and nonsolicitation covenants are unreasonable in their geographic scope and scope of restricted activities because they are broader than necessary to protect Kodiak’s legitimate economic interests.
See Kodiak Building Partners, LLC v. Adams, C.A. No. 2022-0311-MTZ (Del. Ch. Oct. 6, 2022), opinion p.25.
California permits a seller of business goodwill, or of substantially all operating assets with goodwill, to agree not to carry on a similar business within a specified area where the business was carried on, while the buyer carries on a like business there.
Any person who sells the goodwill of a business, or any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity, or any owner of a business entity that sells (a) all or substantially all of its operating assets together with the goodwill of the business entity, (b) all or substantially all of the operating assets of a division or a subsidiary of the business entity together with the goodwill of that division or subsidiary, or (c) all of the ownership interest of any subsidiary, may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein.
See Cal. Bus. & Prof. Code § 16601.
The FTC's final rule, published February 12, 2026, removed its Non-Compete Clause Rule from the Code of Federal Regulations.
Third, the Commission is removing its “Non-Compete Clause Rule” (“Non-Compete Rule”) from the Code of Federal Regulations.
See Federal Trade Commission, 91 Fed. Reg. 6507 (Feb. 12, 2026).
The Delaware Court of Chancery stated that Delaware courts carefully review noncompete and nonsolicit provisions for reasonable geographic scope and duration, a legitimate economic interest and a balancing of the equities.
Delaware courts “carefully review” noncompete and nonsolicit provisions to ensure that they “(1) [are] reasonable in geographic scope and temporal duration, (2) advance a legitimate economic interest of the party seeking its enforcement, and (3) survive a balancing of the equities.”
See Kodiak Building Partners, LLC v. Adams, C.A. No. 2022-0311-MTZ (Del. Ch. Oct. 6, 2022).
The Court of Chancery, quoting earlier authority, stated that a covenant's reasonable scope is measured by the area in which the covenantee has an interest to protect, not by physical distance.
“[T]he reasonableness of a covenant’s scope is not determined by reference to physical distances, but by reference to the area in which a covenantee has an interest the covenants are designed to protect.”
See Kodiak Building Partners, LLC v. Adams, C.A. No. 2022-0311-MTZ (Del. Ch. Oct. 6, 2022).
The Luna agreement barred the seller, during the restricted period, from soliciting customers and from inducing customers, suppliers, employees and other business relations to leave the buyer, and from hiring the buyer's employees.
During the Restricted Period, Seller shall not, directly or indirectly: (i) solicit the business of any Person who is a customer of Buyer in a manner competitive with the Business; (ii) cause, induce or attempt to cause or induce any customer, supplier, licensee, licensor, franchisee, employee, consultant or other business relation of Buyer to cease doing business with Buyer, to deal with any competitor of Buyer or in any way interfere with its relationship with Buyer; (iii) cause, induce or attempt to cause or induce any customer, supplier, licensee, licensor, franchisee, employee, consultant or other business relation of Seller on the Closing Date or within the year preceding the Closing Date to cease doing business with Buyer, to deal with any competitor of Buyer or in any way interfere with its relationship with Buyer; or (iv) hire, retain or attempt to hire or retain any employee or independent contractor of Buyer or in any way interfere with the relationship between Buyer and any of its employees or independent contractors.
See §10.8(b)
The Luna agreement included a mutual post-closing nondisparagement covenant.
After the Closing Date, neither Seller nor Buyer will disparage Buyer or any of Buyer’s Representatives or Seller or Seller’s Representatives, as the case may be.
See §10.8(c)
Section 197 intangibles include a covenant not to compete entered into in connection with acquiring an interest in a trade or business.
(1) In general Except as otherwise provided in this section, the term "section 197 intangible" means- (A) goodwill, (B) going concern value, (C) any of the following intangible items: (i) workforce in place including its composition and terms and conditions (contractual or otherwise) of its employment, (ii) business books and records, operating systems, or any other information base (including lists or other information with respect to current or prospective customers), (iii) any patent, copyright, formula, process, design, pattern, knowhow, format, or other similar item, (iv) any customer-based intangible, (v) any supplier-based intangible, and (vi) any other similar item, (D) any license, permit, or other right granted by a governmental unit or an agency or instrumentality thereof, (E) any covenant not to compete (or other arrangement to the extent such arrangement has substantially the same effect as a covenant not to compete) entered into in connection with an acquisition (directly or indirectly) of an interest in a trade or business or substantial portion thereof, and (F) any franchise, trademark, or trade name.
See 26 U.S.C. § 197(d)(1)(E).
Amortizable section 197 intangibles are amortized ratably over 15 years beginning with the month of acquisition.
A taxpayer shall be entitled to an amortization deduction with respect to any amortizable section 197 intangible. The amount of such deduction shall be determined by amortizing the adjusted basis (for purposes of determining gain) of such intangible ratably over the 15-year period beginning with the month in which such intangible was acquired.
See 26 U.S.C. § 197(a).
Except as provided in its chapter, California voids every contract restraining anyone from engaging in a lawful profession, trade or business, to that extent.
(a) Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.
See Cal. Bus. & Prof. Code § 16600(a).
California reads § 16600 broadly to void any noncompete clause in an employment contract, however narrowly tailored, that does not satisfy an exception in the chapter.
(b) (1) This section shall be read broadly, in accordance with Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, to void the application of any noncompete agreement in an employment context, or any noncompete clause in an employment contract, no matter how narrowly tailored, that does not satisfy an exception in this chapter.
See Cal. Bus. & Prof. Code § 16600(b)(1).
When should the seller sign the restrictive covenant, and does it apply if the sale does not close?
Making a seller restrictive covenant take effect only at closing is a drafting option, as one filed agreement shows for a seller confidentiality covenant that ran from the closing date, although that example concerns confidentiality, not a non-compete.
Courts may also read a seller covenant together with the other sale documents: in Fillpoint, LLC v. Maas, the California Court of Appeal treated a stock purchase agreement and an employment agreement as parts of a single transaction. Reading the documents together did not save the buyer's covenant; the court held that the employment agreement's non-compete did not fit within California's sale-of-business exception and was not enforceable. The court distinguished that covenant, which standing alone was unenforceable under section 16600, from the three-year covenant in the purchase agreement that protected the goodwill acquired, so under California law a covenant meant to rely on the sale exception is better placed in the sale documents than in an employment agreement.
A covenant intended only for a completed sale can be signed with the purchase agreement and say so; one filed agreement ran its five-year non-compete from the closing date, and another provided that, if terminated, the agreement would have no further force and effect apart from listed surviving provisions. Confidentiality works differently, because diligence information is shared before closing; one filed agreement started its post-closing confidentiality covenant from the closing date, while another kept the parties' earlier confidentiality agreement in full force for information provided under the purchase agreement.
The purchase agreement's entire-agreement clause can settle the covenant's relationship with the purchase agreement and any existing confidentiality agreement; one filed agreement superseded all prior agreements, including any letter of intent, while expressly including its nondisclosure agreement in the complete statement of the parties' terms.
Sources for this answer
The California Court of Appeal read the stock purchase and employment agreements in Fillpoint together as parts of a single transaction.
We agree with Fillpoint that the stock purchase agreement and the employment agreement are part of a single transaction and must be read together.
See Fillpoint, LLC v. Maas, 208 Cal. App. 4th 1170 (2012).
The California Court of Appeal held that the employment agreement's non-compete did not fit within the § 16601 sale-of-business exception and was not enforceable.
Accordingly, we hold the employment agreement’s covenant not to compete does not fit within the limited exception (contained in Bus. & Prof. Code, § 16601) to Business and Professions Code section 16600, and is not enforceable.
See Fillpoint, LLC v. Maas, 208 Cal. App. 4th 1170 (2012).
The Bankrate agreement supports an express closing-date start for its confidentiality covenant.
From and after the Closing Date, each Seller Party and its Affiliates will refrain from using or disclosing, and will take all commercially reasonable steps to prevent unauthorized use or disclosure of, any Confidential Information.
See §7.1(a)
The iGourmet agreement confirmed that the parties' earlier confidentiality agreement remained in full force and effect and applied it to information provided to the buyer under the purchase agreement.
Buyer acknowledges and agrees that the Confidentiality Agreement, dated as of January 18, 2024, between Buyer and Seller (the “ Confidentiality Agreement ”) remains in full force and effect and, in addition, covenants and agrees to keep confidential, in accordance with the provisions of the Confidentiality Agreement, information provided to Buyer pursuant to this Agreement.
See §5.03; agreement dated Aug. 30, 2024
The California Court of Appeal stated that the employment agreement's covenant, standing alone, was unenforceable under § 16600, while the purchase agreement's three-year covenant protecting the acquired goodwill had been satisfied.
To review, at this point in the analysis, we know the following: (1) the general rule in Business and Professions Code section 16600 prohibits covenants not to compete, except under two limited exceptions; (2) the exception contained in Business and Professions Code section 16601 protects covenants not to compete entered into in connection with the sale of the goodwill of a business; (3) the covenant not to compete in the employment agreement, standing alone, is unenforceable under section 16600; and (4) the three-year covenant not to compete in the purchase agreement protecting the goodwill acquired by Handleman has been satisfied.
See Fillpoint, LLC v. Maas, 208 Cal. App. 4th 1170 (2012).
The Luna agreement's seller non-compete ran for five years after the closing date.
For a period of 5 years after the Closing Date (the “Restricted Period”), Seller shall not, anywhere in the United States, directly or indirectly invest in, own, manage, operate, finance, control, advise, render services to or guarantee the obligations of any Person engaged in or planning to become engaged in a business that competes with the Business (“Competing Business”), provided, however, that Seller may purchase or otherwise acquire up to (but not more than) 2% of any class of the securities of any Person (but may not otherwise participate in the activities of such Person) if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Exchange Act.
See §10.8(a)
The Bankrate agreement provided that on termination it would have no further force and effect, except for listed surviving provisions and liability for earlier willful and material breach.
In the event of termination of this Agreement as provided above, this Agreement shall immediately terminate and have no further force and effect and there shall be no Liability on the part of any Party to any other Party under this Agreement, except that (a) the covenants and agreements set forth in this Section 9.2 and Article 11 (Miscellaneous) and all definitions herein necessary to interpret any of the foregoing provisions shall remain in full force and effect and survive such termination indefinitely and (b) nothing in this Section 9.2 shall release any Party from any Liability for any willful and material breach by such Party of this Agreement before the effective date of such termination, or otherwise affect any of the rights or remedies available to any Party with respect to the breach of this Agreement by any Party before the effective date of such termination.
See §9.2
The Luna agreement superseded all prior agreements, including any letter of intent, and together with the transaction documents and the nondisclosure agreement constituted the complete statement of the parties' terms.
This Agreement supersedes all prior agreements, whether written or oral, between the parties with respect to its subject matter (including any letter of intent) and constitutes (along with the Transaction Documents and the Nondisclosure Agreement) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter.
See §13.7
What can the buyer recover if a representation is wrong?
What a buyer can recover for an inaccurate representation depends on the agreement's indemnity, survival, threshold, cap and exclusive-remedy terms read together, as one filed asset purchase agreement did by making the seller liable only for losses above a $50,000 basket and capping that liability at the escrowed amount. On a touch screen, a tap shows all 2 sources in this group.
The main dials work together:
| Term | Question it answers |
|---|---|
| Survival period | How long after closing a claim for an inaccurate representation can be brought. |
| Threshold or basket | Whether small losses are absorbed until they pass an agreed amount, and whether recovery then runs from the first dollar or only above the threshold. |
| Cap | The maximum the seller pays, often tied to an escrow or a percentage of the price. |
| Carve-outs | Which representations or claims, such as title, authority or fraud, fall outside the threshold and cap. |
| Exclusive remedy | Whether indemnity replaces other contract and tort claims, and with which exceptions. |
| Source of payment | Whether claims are paid first from escrow or holdback, then by the seller directly, or by setoff against later payments. |
In the same filed agreement, representations survived for 18 months after closing, while fundamental representations survived for the applicable statutes of limitation. Losses from inaccurate fundamental representations were carved out of the basket and cap there, and claims were paid first from the escrow fund and then directly by the seller. Those figures come from one negotiated transaction, and the final indemnification clause reflects the relative leverage of each party.
A smaller filed transaction, a $700,000 e-commerce asset purchase, used a deductible of 0.5% of the price, capped liability for non-fundamental representations at 15% of the price outside fraud, and kept representations alive for 12 months and fundamental representations for three years. Robbie Crosier reports caps frequently between 10% and 20% of the price in a typical small business deal, a practitioner's estimate rather than a measured survey. Whether the threshold is a deductible or a tipping basket changes the result: a tipping basket makes the seller pay all covered damages from the first dollar once the threshold is met, while a deductible basket makes the seller pay only the damages above the threshold. With a $10,000 threshold and $15,000 of damages, a tipping basket pays all $15,000 while a deductible basket pays $5,000.
Governing law also matters: in Delaware, a written contract involving at least $100,000 may set its own period for bringing claims, up to 20 years after the claim accrues. Delaware public policy also does not allow a contractual cap or exclusive remedy to limit a buyer to a capped damages claim when the seller intentionally lied about a fact stated in the contract. Other states' rules differ; in California, for example, a contract whose object, directly or indirectly, is to exempt anyone from responsibility for that person's own fraud is against the policy of the law. A seller's personal liability is a separate allocation that matters because a selling entity that has sold all of its assets can be left an empty shell, as the signing question explains.
Even a clause declaring remedies cumulative can be subject to separate pre-closing and post-closing remedy provisions, as the same filed agreement shows.
Sources for this answer
The Luna agreement made the seller liable for representation losses only after they exceeded a $50,000 basket, and then only for the excess.
(a) Seller shall not be liable to the Buyer Indemnified Parties for indemnification under Section 11.2(a) until the aggregate amount of all Losses in respect of indemnification under Section 11.2(a) exceeds $50,000 (the “Basket”), in which event Seller shall only be required to pay or be liable for Losses in excess of the Basket.
See §11.4(a)
The Luna agreement capped the seller's representation liability at the escrow amount.
The aggregate amount of all Losses for which Seller shall be liable pursuant to Section 11.2(a) shall not exceed the Escrow Amount.
See §11.4(a)
The Luna agreement kept representations alive for 18 months after closing and fundamental representations for the applicable statutes of limitation.
Subject to the limitations and other provisions of this Agreement, the representations and warranties contained in this Agreement, the other Transaction Documents or in any certificate or instrument delivered by pursuant to this Agreement shall survive the Closing and shall remain in full force and effect until the date that is 18 months from the Closing Date; provided, that the Seller Fundamental Representations and the Buyer Fundamental Representations shall survive the Closing for the duration of the applicable statutes of limitation.
See §11.1
The Luna agreement excluded losses from inaccurate seller fundamental representations from its basket and cap.
(b) Notwithstanding the foregoing, the limitations set forth in Section 11.4(a) shall not apply to Losses based upon, arising out of, with respect to or by reason of any inaccuracy in the Seller Fundamental Representations.
See §11.4(b)
The Luna agreement paid indemnification claims first from the escrow fund and then directly by the seller.
(c) Notwithstanding anything herein to the contrary, from and after the Closing, any claims or indemnification under Section 11.2 shall, subject to the foregoing provisions of this Section 11.4, be satisfied (i) first, to the extent recovery is available under the Escrow Fund, pursuant to the Escrow Agreement, and (ii) second, to the extent recovery is not available under the Escrow Fund, directly by Seller.
See §11.4(c)
Delaware allows a written contract involving at least $100,000 to set the period for bringing claims, up to 20 years from accrual.
(c) Notwithstanding anything to the contrary in this chapter (other than subsection (b) of this section) or in § 2-725 of Title 6, an action based on a written contract, agreement or undertaking involving at least $100,000 may be brought within a period specified in such written contract, agreement or undertaking provided it is brought prior to the expiration of 20 years from the accruing of the cause of such action.
See 10 Del. C. § 8106(c).
The Delaware Court of Chancery held that public policy does not permit a contract to limit a buyer to a capped damages claim when the seller intentionally misrepresented a fact embodied in the contract.
For these reasons, when a seller intentionally misrepresents a fact embodied in a contract — that is, when a seller lies — public policy will not permit a contractual provision to limit the remedy of the buyer to a capped damage claim. Rather, the buyer is free to press a claim for rescission or for full compensatory damages.
See ABRY Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032 (Del. Ch. 2006).
The Luna agreement supports cumulative remedies subject to its specified pre- and post-closing remedial sections.
Subject to Section 9.2 until Closing and subject to Section 11.8 after Closing, the rights and remedies of the parties to this Agreement are cumulative and not alternative.
See §13.6
The iGourmet agreement imposed a deductible of 0.5% of the purchase price on indemnification claims.
(a) The Indemnifying Party shall not be liable to the Indemnified Party for indemnification under Section 7.01 or Section 7.02, as the case may be, until the aggregate amount of all losses in respect of indemnification under Section 7.01 or Section 7.02 exceeds 0.5% of the Purchase Price (the “ Deductible ”), in which event the Indemnifying Party shall only be required to pay or be liable for losses in excess of the Deductible.
See §7.03(a); agreement dated Aug. 30, 2024
The iGourmet agreement capped indemnification for non-fundamental representations at 15% of the purchase price, outside fraud.
(b) The aggregate amount of all losses for which an Indemnifying Party shall be liable pursuant to Section 7.01 or Section 7.02, as the case may be, shall not exceed 15% of the Purchase Price for losses relating to representations and warranties that are not Fundamental Representations and do not arise from the fraudulent actions of the Seller.
See §7.03(b); agreement dated Aug. 30, 2024
The iGourmet agreement kept representations alive for 12 months, and fundamental representations and fraud claims for three years.
Subject to the limitations and other provisions of this Agreement, the representations and warranties contained herein shall survive the Closing for a period of 12 months, provided , however , that any representations and warranties contained in Fundamental Representations or are the subject of a fraud claim will survive the Closing for a period of three years.
See §6.01; agreement dated Aug. 30, 2024
Robbie Crosier reports caps frequently ranging from 10% to 20% of the purchase price in a typical small business deal.
Typical Range: The cap is often set as a percentage of the total purchase price, frequently ranging from 10% to 20% for a typical small business deal.
See Robbie Crosier, Explanation of the Indemnification Clause in Business Acquisitions, Peters Kussmaul Crosier (June 23, 2025).
Laura Warf sets up an example with a $10,000 basket threshold and $15,000 of damages.
To better illustrate the differences in the types of baskets, consider a scenario where the basket threshold is set at $10,000 and the buyer suffers $15,000 in damages.
See Laura Warf, Purchase Agreement Indemnification Provisions, Davis Wright Tremaine Family Business Resource Center (Apr. 2021).
Laura Warf illustrates that on $15,000 of damages and a $10,000 threshold, a tipping basket pays $15,000 and a deductible basket pays $5,000.
A tipping basket would require the seller to pay all $15,000 in damages, while a deductible basket would only require the seller to pay $5,000 (i.e., the amount by which the damages exceed the basket threshold).
See Laura Warf, Purchase Agreement Indemnification Provisions, Davis Wright Tremaine Family Business Resource Center (Apr. 2021).
Robbie Crosier describes the final indemnification clause as a product of negotiation reflecting each party's relative leverage.
The final indemnification clause is a product of negotiation, reflecting the relative leverage of each party.
See Robbie Crosier, Explanation of the Indemnification Clause in Business Acquisitions, Peters Kussmaul Crosier (June 23, 2025).
Laura Warf explains that a tipping basket requires the seller to pay all covered damages from the first dollar once the threshold is met.
A tipping basket requires the seller to pay for all covered damages suffered by the buyer once the pertinent trigger threshold is met, starting with the first dollar of damages.
See Laura Warf, Purchase Agreement Indemnification Provisions, Davis Wright Tremaine Family Business Resource Center (Apr. 2021).
Laura Warf explains that a deductible basket makes the seller responsible only for damages that exceed the threshold.
A deductible basket functions like an insurance deductible, i.e., once it is triggered, the seller is only responsible for the damages that exceed the basket threshold.
See Laura Warf, Purchase Agreement Indemnification Provisions, Davis Wright Tremaine Family Business Resource Center (Apr. 2021).
California Civil Code § 1668 makes contracts whose object is to exempt anyone from responsibility for his own fraud, willful injury or violation of law against the policy of the law.
All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.
See Cal. Civ. Code § 1668.
Imke Ratschko explains that a selling entity that has sold and transferred all of its assets remains an empty shell.
In that case, once the seller sells and transfers all of its assets, there is really nothing left. The entity remains an empty shell.
See Imke Ratschko, The Basics of an Asset Purchase Agreement, Ratschko PLLC (July 25, 2022; updated July 28, 2022).