The buyer's draft purchase agreement includes negative operating covenants that prevent us from making capital investments over $25,000, hiring key personnel, or altering compensation plans between LOI and closing. How do we maintain standard operational authority during this interim period?

Question

Tyler Smith · Accepted Answer

Negative covenants between signing the LOI and closing are standard. Buyers want to ensure the company they agreed to buy does not change materially before they take title. However, overly restrictive covenants will paralyze your leadership team and harm business momentum during a window that frequently stretches beyond ninety days.

You must negotiate clear operational carve-outs tied directly to your approved annual operating budget and quarterly Rocks. First, establish that any expense, hire, or capital expenditure explicitly planned in your approved V/TO® and budget does not require buyer consent. The consent requirement should apply only to unbudgeted, extraordinary actions.

Second, increase the dollar thresholds. A $25,000 capital expenditure cap is micromanagement for a mid-market company. Push that threshold to a realistic operating level, such as $100,000 or a percentage of monthly revenue, and tie it to normal course of business language.

Third, retain full authority to fill existing seats on your Accountability Chart if vacancies occur. If a key leader resigns during diligence, your Integrator cannot wait three weeks for buy-side committee review to recruit a backfill. The agreement should permit hiring replacements within standard compensation bands without buyer pre-approval.

Finally, establish a deemed consent mechanism. If you request approval for a strategic action outside the ordinary course, require the buyer to approve or reject the request in writing within five business days. The contract must state that failure to respond within that timeframe constitutes legal approval. Never let a buyer stall your operations while they complete financing.