One Contract the Buyout Agreement Forgot to Account For

The situation

Karima had thought the problem was solved back in March. Their finance director had exchanged emails with the outgoing owner's finance director, describing the equipment contract and asking for confirmation it would not count against the spending restrictions in the buyout agreement. The reply had said, in three casual lines, that it should be fine given the circumstances. Karima had treated that as settled and moved on. It was not settled, and by the time anyone realized that, the deadline on the equipment contract was six weeks away.

Karima, an IT support lead, Jamal, who ran operations, and Jae-won, a former librarian who had moved into client relationship management, had spent eleven years together building the technology arm of a company that supplied networked catalogue and lending systems to public libraries and school boards across southwestern Ontario, based in St. Thomas. When the founder decided to retire, the three of them put together a management buyout rather than let the company go to an outside buyer who might not keep the team or the client relationships intact. The deal, financed through a mix of their own savings, a vendor take-back loan from the founder, and a modest bank facility, valued the company at roughly $19 million.

Buyout agreements like this one routinely include interim operating covenants, restrictions on what the target company can do between signing and closing, meant to stop either side from changing the value of what is being bought or sold before the deal completes. This one capped capital spending at $75,000 without the founder's written consent, a limit set to prevent Karima's team from committing the company to major new equipment purchases on the founder's dime before the sale closed. Nobody on either side had thought carefully, at the time the covenant was drafted, about a contract the company had already signed two months earlier: a $310,000 network hardware refresh for a regional library board, committed before the buyout agreement existed, with a cancellation penalty if the equipment order was not confirmed by a fixed date.

That contract sat squarely over the covenant's limit, and the casual email exchange Karima had relied on was not a formal amendment to anything. When the founder's lawyer reviewed the file ahead of closing and flagged the spending commitment, the team's budget for legal work on this deal, already stretched thin by the buyout financing itself, had almost nothing left for a drawn-out fight. What remained, by Karima's own estimate, was closer to a week of contested negotiation than a month, and a formal dispute over whether the covenant had been breached could easily run past that.

The complication

An interim operating covenant is not a formality. It is enforceable, and a material breach of it can give the other side grounds to delay closing, demand a price adjustment, or in some agreements walk away from the deal entirely. The $75,000 capital spending cap in this agreement existed to protect the founder's interest in the company as it stood at signing, and to protect the bank financing the transaction, which had underwritten the deal based on the company's balance sheet as described in the purchase agreement, not a balance sheet with an extra $310,000 obligation layered on top.

The library hardware contract had been signed before the buyout agreement, which mattered for how it should have been handled, but did not automatically excuse it from the covenant's reach. The covenant as drafted restricted spending during the interim period, meaning the period between signing and closing, regardless of when the underlying obligation to spend had first arisen. If the equipment order was confirmed and paid for during that window without the founder's written consent, it was a breach on its face, whatever the earlier email exchange had implied. And if it was not confirmed by the library board's deadline, the company faced a cancellation penalty and, more seriously, real damage to a client relationship the entire business depended on continuing after closing.

The email from March made things worse rather than better. It read informally and did not identify itself as an amendment to the purchase agreement, use the agreement's defined terms, or come from anyone with clear authority to bind the founder to a change in the covenant. Relying on it as consent, if the founder's side later disputed that reading, would have put the team in the position of arguing an informal exchange overrode a signed contractual restriction, a weak argument to be making days before a scheduled closing, and one that would cost real money in legal fees to make even reasonably well. With almost no budget left for that fight, Karima's team needed a fix that did not depend on winning an argument about what the email had meant.

What we did

1. Set aside the March email as a fallback, not a foundation. Rather than argue the informal exchange already constituted consent, a weak position given how casually the reply was worded and how unclear the sender's authority was, we treated the email as background only. That let us commit the team's limited legal budget entirely to one goal: a clean, formal amendment signed before the library contract's cancellation deadline arrived, instead of spending scarce hours defending an old email neither side had drafted with the covenant in mind.
2. Quantified the actual conflict precisely. Rather than rely on the team's recollection of the hardware contract's terms, we contacted the regional library board's procurement office directly to confirm the exact cancellation penalty the company faced if the order was not confirmed in time. We then weighed that verified figure against the covenant's stated purpose, protecting the founder and the bank from unplanned spending, so we could show the founder's side plainly that this was a narrow, dated, quantifiable obligation, not an attempt to spend freely during the interim period.
3. Drafted a single-purpose carve-out, not a broader renegotiation. Given how little budget either side had left for legal fees on a deal this size, we proposed the narrowest possible amendment: written consent for this one contract, identified by name and dollar amount, with no change to the $75,000 cap for anything else the company might need to spend on before closing. A narrow, specific ask is faster and cheaper for the other side's lawyer to review and approve than a general reopening of the covenant would have been.
4. Went directly to the founder's lawyer with a short deadline of our own. Rather than route the request back through the same informal email channel that had caused the problem in the first place, we sent a formal written request attaching the library board's actual cancellation deadline, making clear in plain terms that delay carried a real, quantified cost for the company both sides were about to jointly close on and had every reason to want protected.
5. Offered a modest concession to move quickly. With legal budget on both sides too thin to sustain a contested negotiation over several weeks, we estimated what a short, focused dispute would likely cost in fees for both parties, then advised the team to offer the founder a small adjustment to the vendor take-back loan's interest rate instead, as the price of a fast, uncontested consent rather than a drawn-out argument neither side could really afford to have.
6. Documented the consent formally and narrowly. The final amendment named the specific contract, the specific dollar amount, and the specific deadline, and stated plainly that it did not alter the $75,000 cap for any other spending during the interim period. That precision mattered to the bank financing the deal as much as to the founder, since neither wanted a single carve-out read later as a general loosening of the spending restriction they had both relied on.

The outcome

The founder's lawyer agreed to the narrow amendment within four days of the formal request, and the hardware order was confirmed two days ahead of the library board's deadline, avoiding the cancellation penalty and preserving the client relationship the buyout depended on. The rest of the $75,000 spending cap stayed exactly as originally negotiated, with no broader loosening of the covenant that might have concerned the bank financing the deal.

Getting there cost the team a quarter-point increase on the vendor take-back loan's interest rate for its full term, a concession offered specifically to keep the negotiation fast and cheap rather than contested. Over the life of the loan, that amounted to a real, ongoing cost the team had hoped to avoid, and it was a direct consequence of relying on an informal email months earlier instead of getting the contract properly addressed in the covenant language when the buyout agreement was first drafted.

The deal closed on schedule, and the library contract is now one of several the company has renewed since the buyout completed. Karima has since described the interest rate concession as an expensive but affordable lesson: cheaper, by a wide margin, than the alternative of a contested breach dispute days before closing, but a cost that a more careful first pass at the covenant language would have avoided entirely. The team now flags every pre-existing contractual commitment before signing any restriction on spending, rather than assuming an informal conversation will cover a gap later.

What you can learn from this