Seller Defaulting on Covenants

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November 13, 2023

by a searcher from University of California, San Diego in Portland, OR, USA

Recently had the experience the seller of a business defaulting on their post-closing covenants. This was contemplated as a weakness of the deal and guided deal structure, along with how consideration was remitted. The seller did not meet their obligation to complete and deliver a production space in specified condition. Additionally, the Seller incurred expenses and obligation for this space that they were not making payments on. Ultimately, we assumed the liabilities and settled to claw back and all rolled equity and contingent earn outs. Great learnings using diligence, deal structure and legal to mitigate the risks and fall out.

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Reply by a professional
from University of Southern California in North Palm Beach, FL, USA
Good heads up message for everybody, yours. I've seen this more times than I can count my fingers and toes, several times. And for borrowers: Mostly, keep in mind, that lenders get paid no matter what, especially when they say hello to your personal guarantee and you say goodbye to your money and maybe your company.
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Reply by a searcher
from University of Toronto in Mexico City, CDMX, Mexico
Very informative. What type of covenants did you have for the seller that you found they breached? Anything else you were glad you had?
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