During the phase from LOI to close, the buyer's lawyers are pushing an incredibly restrictive ordinary course of business covenant that prevents us from making any tactical hires or software upgrades. How do we negotiate these pre-closing operational covenants so we do not freeze our momentum?

Question

Tyler Smith · Accepted Answer

During the critical period between signing the Letter of Intent (LOI) and closing the deal, buyers often use ordinary course of business covenants to maintain the status quo of your operations. If you need to make a strategic hire or implement a new software system to achieve your V/TO targets, their lawyers may argue that these actions violate the agreement. This operational paralysis can significantly impede your momentum at a time when sustained performance is crucial.

Strategies for Negotiating Covenants

To prevent operational stagnation and protect your ability to run the business effectively, negotiate precise and quantitative thresholds directly into the covenants of your purchase agreement.

Here are key negotiation points:

• Define Clear Carve-Outs: Instead of accepting blanket restrictions on all non-budgeted expenses, insist on defining specific carve-outs. For example, establish a clear threshold allowing capital expenditures up to a certain dollar amount without requiring buyer approval.
• Staffing Autonomy: Ensure you retain the unilateral right to replace departing staff members listed on your [Accountability Chart](/qa/promoting-internal-operations-manager-integrator). This is crucial, provided their salaries align with your existing budget. This protects your operational continuity.
• Utilize Your Scorecard: Leverage your weekly [Scorecard](/qa/how-to-review-scorecard-under-five-minutes) to demonstrate to the buyer that these ongoing decisions, such as essential software upgrades or key hires, are part of your established business-as-usual playbook, not sudden anomalies. This helps you justify these actions as maintaining the operational playbooks that support your company's value.
• Establish Operating Boundaries: By proactively establishing clear operating boundaries in the initial draft of the contract, you empower your leadership team to continue managing the business effectively while keeping the deal on track. Do not allow their due diligence team to slow your execution.

Keep your Rocks moving forward and ensure your team remains focused on delivering the results that justified your valuation in the first place. This proactive approach helps protect your business from operational risks that could cause a buyer to walk away or renegotiate.

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