Key takeaways
- The ordinary course covenant requires the seller to operate the business between signing and closing as it has been operated historically — no material changes to the business without buyer consent. This sounds simple and is routinely violated by sellers who do not understand what "material" means in this context.
- Negative covenants are the specific list of actions the seller cannot take without buyer consent. The list is longer than most founders expect: hiring above a certain salary threshold, signing contracts above a dollar threshold, paying bonuses, making capital expenditures, incurring new debt, and paying dividends are all commonly restricted.
- Buyer consent rights during the pre-closing period are not a courtesy — they are contractual. A seller who takes a restricted action without consent has breached a covenant. The buyer's remedy options include terminating the agreement, seeking specific performance, or using the breach as leverage for a price reduction.
- The pre-closing period is typically 60–180 days. During that window, the business must keep running, customers must be served, employees must be retained, and the seller must simultaneously manage all of this while completing diligence, negotiating the SPA, and preparing for close.
- Carve-outs for ordinary course operations — defined specifically and negotiated into the SPA before signing — are the seller's most important protection against inadvertent covenant breach. Vague ordinary course language without specific carve-outs leaves every material decision subject to buyer consent.
In this article
60–180 days
Typical pre-closing period during which seller covenants are operative
Top 3
Covenant breach ranks among the top three buyer arguments for price reduction in LMM transactions
$0
Cost of negotiating carve-outs into the SPA before signing; typically included in normal legal drafting
The signed purchase agreement is the document most founders treat as the finish line. It is not. It is the starting line for a period of conditional operation in which the seller must run the business normally, complete diligence, negotiate final agreement language, and satisfy closing conditions — all while subject to a set of contractual restrictions that limit what they can do without buyer permission.
Pre-closing covenants are the provisions in the purchase agreement that govern how the seller operates the business between signing and closing. They exist because the buyer has agreed to pay a specific price for a specific business in a specific condition. The covenants protect the buyer's right to receive what they agreed to buy — not a business that has materially changed between the date of the LOI and the date the wire arrives.
Most covenant violations are not deliberate. A founder who signs a $180K employment offer the week after the purchase agreement is signed, without checking whether that salary exceeds the consent threshold, has breached a covenant. The breach is real. The buyer's knowledge of it, and whether they choose to use it, is a separate question.
The ordinary course covenant: what it actually requires
Every purchase agreement contains an ordinary course of business covenant. The language is typically some version of: "From the date of this agreement until closing, seller shall operate the business in the ordinary course consistent with past practice."
Ordinary course consistent with past practice is not a vague standard — it is a specific contractual commitment that the business will be operated the same way it has been operated historically. The question buyers ask when evaluating whether an action falls within ordinary course is: has the seller done this before, with this frequency, at this scale?
Actions that are clearly within ordinary course: paying employees their normal salaries, purchasing inventory at normal volumes from existing suppliers, honoring existing contracts, paying normal recurring expenses, and collecting receivables as usual. Actions that are clearly outside ordinary course: entering a new line of business, signing a material contract with a new customer on non-standard terms, making a capital investment not in the historical budget, or changing accounting policies.
The ambiguous middle ground — where most covenant issues arise — includes: replacing a key employee who resigns and offering a higher salary to attract a replacement; renewing an expiring customer contract with different terms; making a discretionary bonus payment to retain a valued employee; prepaying a vendor for favorable pricing; and making a capital expenditure that is larger than the historical average but not unprecedented.
Negative covenants: the specific restricted actions list
In addition to the general ordinary course covenant, purchase agreements contain a negative covenant schedule — a specific list of actions the seller cannot take without prior written buyer consent. This list is longer, more specific, and more consequential than most founders expect.
The negative covenant list in a standard LMM purchase agreement typically includes: incurring any new indebtedness above a specified threshold; making any capital expenditure above a specified threshold (often $25K–$100K per item or in aggregate); entering into any new material contract or amending any existing material contract above a dollar threshold; hiring any employee with total compensation above a specified annual amount; terminating any employee other than for cause; paying any bonus, retention payment, or severance not consistent with historical practice; making any change to accounting methods, policies, or practices; paying any dividend or distribution to equity holders; issuing any new equity or equity rights; making any acquisition of assets or businesses; and amending the organizational documents of the company.
The negative covenant list is not a formality. Each item on it was negotiated into the agreement because buyers have experienced transactions where a seller took that specific action between signing and closing, and the action changed the business the buyer had agreed to purchase. Treat each item as a real restriction, not boilerplate.
The dollar thresholds in the negative covenant schedule deserve careful attention during SPA negotiation. A threshold of $50K per capital expenditure may be appropriate for a $3M EBITDA business. For a $10M EBITDA business with a historical capex run rate of $800K per year, a $50K threshold would require buyer consent for routine maintenance capital. Negotiating thresholds that reflect the actual scale of normal business operations is one of the most practical pre-closing protections a seller can obtain.
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Schedule a conversation →Buyer consent: how to get it and what happens if you don't
Buyer consent for restricted actions is typically required to be "prior written consent" — meaning the seller must request and receive written approval before taking the action, not notify the buyer after the fact. Email confirmation from the buyer's designated representative typically satisfies the written consent requirement.
The practical process for managing consent requests during the pre-closing period: identify a single designated contact at the buyer for consent requests; establish a response timeline expectation (24–72 hours for routine requests is reasonable and should be defined in the SPA or agreed separately); document every consent request and approval in a log; and flag the most time-sensitive consent needs early in the pre-closing period rather than at the last minute.
The seller who develops a clean consent request process — brief description of the proposed action, the business rationale, the dollar amount, and a recommendation — gets faster responses and creates a paper trail that protects both parties. The seller who calls informally and does not document the conversation has no evidence of consent if the buyer later disputes the action.
If a seller takes a restricted action without obtaining required consent, the buyer has several potential remedies depending on the SPA language and the materiality of the breach. Termination rights are typically limited to material breaches — a single routine hiring decision above the threshold is unlikely to give the buyer termination rights. More commonly, the buyer raises the breach as a closing condition concern and uses it as leverage to negotiate a purchase price reduction, an escrow increase, or an indemnification provision for the specific action taken.
The buyer who discovers a covenant breach during the pre-closing period — not at closing — is in a more powerful position than the seller sometimes assumes. The breach is documented, the seller is committed to the transaction, and the buyer can negotiate a remedy at a moment when the seller's leverage is limited. This is why proactive consent requests, even for actions the seller believes are clearly within ordinary course, are better than the alternative.
Access covenants: what buyers can require between signing and close
Pre-closing covenants run in both directions. In addition to the restrictions on the seller's conduct, the SPA typically includes access covenants that require the seller to provide the buyer with reasonable access to the business's books, records, facilities, and personnel during the pre-closing period.
Access covenants are the legal basis for the buyer's ongoing diligence activity between signing and closing. The buyer who wants to tour a facility, interview a key employee, or review a specific set of financial records during the pre-closing period typically has a contractual right to do so, subject to reasonable notice and confidentiality requirements.
The access covenant creates an obligation for the seller to facilitate legitimate buyer requests, but it does not give the buyer unlimited operational access. The seller is entitled to set reasonable conditions: advance notice of visits, presence of a seller representative during management interviews, and limits on the frequency of requests that would materially disrupt operations. These conditions should be negotiated into the access covenant language before signing.
Customer and employee notification requests during the pre-closing period deserve special attention. Most purchase agreements prohibit the buyer from directly contacting customers or key employees without seller consent before closing. The timing and management of those notifications — who tells the customer, what they say, and when — is one of the most operationally sensitive aspects of the pre-closing period and should be specifically addressed in the SPA.
How to negotiate protective carve-outs before signing
The most effective pre-closing protection for a seller is negotiating specific carve-outs into the negative covenant schedule before the SPA is signed. A carve-out is an explicit exception to a restricted action that the parties agree in advance is permitted without individual consent.
Carve-outs to negotiate into the negative covenant schedule before signing
Annual bonus payment carve-out
Explicitly permit the payment of annual performance bonuses in amounts consistent with prior years' practice and the budget agreed at signing; specify the maximum aggregate amount and the payment timing
Ordinary course employment decisions
Define an explicit salary threshold above which consent is required; ensure the threshold reflects the actual range of normal hiring decisions for the business; carve out replacement hires at the same salary as the departing employee
Scheduled capital expenditures
Attach the approved capex budget to the SPA as a schedule; treat all items on the schedule as pre-approved; require consent only for unbudgeted or above-budget items
Customer contract renewals
Explicitly permit renewal of existing customer contracts on terms no less favorable to the business than the existing contract; require consent only for new contracts or renewals with materially changed terms
Vendor payments in ordinary course
Explicitly permit all vendor payments in the ordinary course, including early payment for customary discounts, up to a defined threshold
Retention arrangements approved at signing
If retention agreements for key employees are anticipated, negotiate them at signing and include them in a schedule of pre-approved compensation arrangements
Carve-outs are not concessions that buyers resist — they are clarifications that serve both parties. A buyer who approves a specific salary threshold in the carve-out schedule does not have to field consent requests for every routine hire. A seller who has a carve-out for annual bonus payments does not have to worry about breaching a covenant with a payment that has been made at the same time in the same amount for the past five years.
Frequently asked questions
What happens if I need to take a restricted action quickly and cannot reach the buyer for consent?
The SPA should include a deemed consent provision: if the seller requests consent and the buyer does not respond within a defined period (typically 3–5 business days), consent is deemed granted. Negotiate this provision before signing. Without it, a buyer who is slow to respond to consent requests can create operational gridlock. The deemed consent period should be shorter for time-sensitive actions (1–2 business days for personnel decisions) and longer for material contract or capital decisions.
Can a seller back out of a signed purchase agreement if the pre-closing period becomes too burdensome?
Generally no, without a specific termination right. The SPA's termination rights for the seller are typically limited to situations where the buyer has materially breached its obligations (including its obligation to close), a closing condition becomes impossible to satisfy, or a specific reverse termination fee provision applies. Operational burden during the pre-closing period is not a termination right. This is why the covenant structure should be negotiated carefully before signing — not after the seller is committed.
How long is a typical pre-closing period in an LMM transaction?
60 to 180 days, depending on the complexity of the closing conditions and the diligence required. Transactions that require regulatory approval, real estate transfers, license assignments, or lender consent (for SBA or other assumed debt) typically run 90–180 days. Transactions without these complications often close in 60–90 days from signing. The pre-closing period should be modeled before the LOI is signed so that the seller understands how long the covenant restrictions will be operative.
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Disclaimer: Financial figures and case studies in this article are illustrative, based on representative middle market assumptions, and are not guarantees of outcome. Statistical references are drawn from cited third-party research; individual transaction and operational results vary based on business characteristics, market conditions, and deal structure. This content is for informational purposes only and does not constitute legal, financial, or investment advice. Consult qualified advisors for guidance specific to your situation.
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