A dividend the seller needed to pay almost cost him the deal

The situation

The call came in on a Tuesday afternoon, and Laszlo did not open with pleasantries. He had signed a purchase agreement six weeks earlier to sell his Bowmanville industrial equipment company, a deal in the thirty to fifty million dollar range, to a strategic buyer expanding into eastern Ontario manufacturing. Closing was five weeks out. And he had just learned that a personal guarantee on a private loan, taken years earlier to fund the company's initial expansion, was coming due before the closing date, in an amount that would require him to draw a dividend from the company to cover.

The purchase agreement, like most agreements between signing and closing, contained an interim operating covenant: a set of restrictions on what the seller could do with the target company in the gap period before closing, meant to preserve the business the buyer had agreed to buy. Among the standard restrictions, alongside limits on new hires, capital expenditures and material contracts, was a flat prohibition on dividends or other distributions outside the ordinary course. It was boilerplate. Nobody had expected it to matter.

Laszlo's engineering background meant he had drafted much of the company's early operating procedures himself, and he understood the mechanics of the covenant well enough to know it was not ambiguous. The dividend restriction did not carve out personal financial obligations, and there was no mechanism in the agreement for an exception. If he drew the dividend anyway, he would be in breach of a covenant the buyer could use to walk away from, or reprice, a deal that was otherwise fully negotiated and on track.

His first call that week went to Gabor, a professional engineer who had run the plant floor alongside Laszlo for over a decade before retiring two years earlier, and who still understood the company's operations better than almost anyone left on staff. Gabor read back through the covenant language Laszlo forwarded him, agreed there was no ambiguity in it worth testing, and told him flatly not to touch the dividend until a lawyer had actually looked at the agreement. His second call that week was to Ifrah, his chiropractor and closest confidante through the sale process, who had watched him work through eighteen months of due diligence and negotiation and told him plainly that he needed to bring this to us before he did anything else. He had not drawn the dividend yet. He had not told the buyer's counsel yet either. What he had was five weeks, a covenant that said no, and a debt that would not wait.

What was actually at stake

The obvious reading of Laszlo's problem was that he needed money and the contract said he could not have it. The real stakes were more layered than that. An interim operating covenant exists to protect the buyer's bargain: the price was set based on the company as it existed at signing, and any leakage of cash out of the company before closing, whether through a dividend, an unusual bonus, or an off-cycle payment, effectively reduces the value the buyer is paying for without reducing the price. That is why these covenants are drafted tightly and why buyers resist carve-outs to them almost reflexively.

If Laszlo simply breached the covenant, the buyer would have several options, none of them good for him. Because the covenant was drafted as a condition to closing, the buyer was not obliged to close while it went unsatisfied; whether it could also terminate the agreement outright would depend on the termination provisions, on whether the breach cleared any materiality threshold, and on whether Laszlo had a period to cure it first, and the buyer could also simply waive the condition and proceed. It could use the breach as leverage to renegotiate price downward, arguing the company delivered at closing would be worth less than the one it agreed to buy. Or it could close and pursue a claim afterward for the value of the dividend, layered onto whatever else a post-closing review turned up, though whether that claim survived would depend on the agreement's survival provisions and on whether the contract let the buyer claim for a breach it knew about before closing; closing with knowledge and no such protection could sink the claim entirely. Given that the deal had taken eighteen months to reach signing, the risk of losing it entirely, or having it repriced under pressure with five weeks to close, was the thing that mattered most.

There was also a narrower question worth getting right at the outset: whether the loan Laszlo needed to repay was genuinely personal, unconnected to the business, or whether there was an argument the company itself had some obligation tied to it. If the debt had any connection to the business's own financing history, that would change how we approached the buyer, because a business-connected obligation is a very different conversation than a purely personal one dressed up as urgent.

We confirmed early that the loan was Laszlo's alone, taken in his personal capacity years before the company had any external investors, secured against his own assets rather than the company's. That mattered, because it meant we were not asking the buyer to accept a payment that benefited the business in disguise. We were asking for a narrow, one-time exception to a covenant that existed for good reason, and the strength of that request depended entirely on how we framed it and when we raised it.

What we did

1. Reviewed the interim operating covenant and the closing conditions clause together to confirm exactly how a breach would be treated, since some agreements make covenant compliance a closing condition the buyer can waive or insist on, while others simply create a post-closing indemnity claim; this one was drafted as a hard condition, which meant the buyer had real leverage if we mishandled the request, and we needed to know the exact size of that leverage before deciding how to approach the conversation.
2. Confirmed the loan was entirely personal to Laszlo, with no connection to the company's financing or operating history, pulling the original loan documents and the security registration against his personal assets, so that any request to the buyer could be framed honestly as a narrow personal accommodation rather than something touching the business itself, which mattered because a business-connected request would have invited far more scrutiny.
3. Modelled what an unauthorized breach would actually cost against what a negotiated request might cost, walking Laszlo through both paths in plain terms, so he understood that quietly drawing the dividend and hoping the buyer never noticed was not a real option given the covenant's drafting and the size of the post-closing review the buyer's team had already signalled it intended to run.
4. Held back from raising the issue immediately while we monitored the deal's progress, because the buyer's integration team had begun sending signals in the weeks after signing that its own plans for the company were shifting, and we wanted to understand that shift fully before opening a conversation that would show our hand and reveal how urgently Laszlo needed the accommodation.
5. Identified the buyer's change in position when its counsel disclosed, in a routine diligence follow-up, that the buyer intended to fold Laszlo's company into an existing eastern Ontario division rather than run it standalone as originally represented, a structural change that had its own implications for representations made at signing and gave us a legitimate reason to reopen dialogue on deal terms generally.
6. Used that disclosure as the basis for a broader conversation rather than a one-sided ask, raising both Laszlo's dividend request and a question about whether the buyer's revised integration plan required any adjustment to the deal's own terms, which reframed the discussion as a mutual accommodation between two parties each needing something rather than Laszlo asking for a favour with nothing to offer in return.
7. Negotiated a narrow, defined carve-out to the covenant permitting a single dividend up to a fixed amount, tied specifically to Laszlo's documented personal obligation and supported by the loan documents we had already assembled, with the amount deducted dollar for dollar from the purchase price at closing so the buyer's economic position was unaffected by the accommodation, giving the buyer's own internal approval process an easy answer: the price had moved, not the company.
8. Papered the carve-out as a formal amendment to the purchase agreement, rather than an informal email exchange, walking both sets of counsel through the exact mechanics of how the dividend would be accounted for at closing, so both sides had a clear, enforceable record of exactly what was permitted rather than a verbal understanding that could be disputed later.

The outcome

Laszlo drew the dividend under the amended covenant, repaid the personal loan before it came due, and the deal closed five weeks later on the schedule the parties had originally set. The purchase price was reduced by the exact amount of the dividend, so the buyer received the company at the value it had agreed to pay for, and Laszlo avoided the breach that could have unravelled eighteen months of negotiation over a debt that, in the context of a deal this size, was a comparatively small figure.

The turn in the negotiation came from the buyer's own change in plans, not from anything Laszlo controlled, and that is worth being honest about. Had the buyer's integration strategy not shifted in a way that gave us something to raise alongside Laszlo's request, the conversation about the dividend would have been considerably harder, and the outcome far less certain; a buyer under no pressure of its own has little incentive to grant an exception to a covenant it drafted for good reason. What we controlled was recognizing the shift when it surfaced in a routine diligence exchange, resisting the urge to raise the dividend issue in isolation, and using the buyer's own change in plans to turn a request that could have looked like weakness into a mutual conversation about terms that no longer matched either side's current situation.

There was a cost to the waiting itself. The five-week runway to closing narrowed to barely two weeks by the time the amendment was fully papered and signed, which left little margin for anything else to go wrong in the final stretch, and Laszlo spent those final weeks more anxious than he needed to be about a deadline that was, in the end, met comfortably.

Laszlo closed the sale on schedule and treats the episode now as a reminder of how narrow the room can be between a covenant that exists for good reason and a personal circumstance that has nothing to do with the deal. Gabor's blunt advice not to touch the dividend before a lawyer had read the agreement bought the day or two of restraint that let the file reach us before any damage was done. Ifrah, who had pushed him to call us before acting on his own rather than quietly drawing the dividend and hoping it went unnoticed, remains the person he credits with keeping a personal debt from becoming a corporate crisis that could have cost him a deal eighteen months in the making.

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