FinanceDeal Structure
Financial Covenant Compliance
Also known as: debt covenant compliance, credit agreement covenants, post-close financial covenants
The financial tests — leverage ratios, minimum EBITDA, capex limits — the acquired company must keep meeting after closing under its credit agreement. A breach, often caused by the buyer's own decisions, can block seller-note payments, accelerate the debt, or trigger for-cause consequences for the founder.
WHY IT MATTERS
When a PE buyer uses debt to fund an acquisition, the lender attaches covenants the company must satisfy quarter after quarter — maximum leverage, minimum EBITDA, capped capital spending, and similar tests. These live in the credit agreement, not the purchase agreement, so founders often never see them. They matter intensely anyway.
A covenant breach hands the senior lender blocking rights: it can freeze distributions to junior creditors — which is exactly where the seller note sits. So a founder who took part of their price as a seller note can watch those payments stop, not because the buyer can't pay, but because a leverage test tripped — sometimes due to the buyer's own aggressive add-on borrowing or fee extraction. Worse, sustained breaches can cascade into default and restructuring that wipes out junior positions entirely. Founders carrying a seller note should understand the covenant package and intercreditor terms before closing, and negotiate standstill limits and cure rights so a technical breach can't indefinitely strand their money.