How Buy-Side Team Used Mage for Post-Signing Covenant Compliance

The period between signing and closing is often the most anxious phase of an acquisition. The buyer has committed to purchase, but the seller still controls the business. Operating covenants protect the buyer, but monitoring compliance manually is challenging. AI-powered analysis provided real-time visibility into seller conduct.

The Situation

A PE buyer was acquiring a specialty chemical distributor for approximately $85M. The purchase agreement was signed in January with a targeted closing in April, subject to regulatory approval and standard closing conditions.

The 90-day interim period was unusually long due to required HSR clearance and state-level licensing transfers. During this time, the seller would continue operating the business under a comprehensive set of operating covenants designed to preserve the business as negotiated.

The covenants restricted the seller from:

• Entering contracts above $100,000 without buyer consent
• Making capital expenditures above $50,000 outside the approved budget
• Hiring or terminating employees above defined compensation thresholds
• Changing pricing or customer terms materially
• Taking on additional debt or making distributions

The buyer's deal team was concerned about monitoring compliance over 90 days. The seller's business involved constant contract activity—new customer orders, vendor agreements, equipment purchases, and personnel changes. Manual tracking against spreadsheets was error-prone and labor-intensive.

The Approach

The deal team deployed Mage for ongoing covenant compliance monitoring.

Phase 1: Covenant Extraction

Mage analyzed the signed purchase agreement and extracted all operating covenants into a structured framework:

| Category | Covenant | Threshold | Consent Required | |----------|----------|-----------|------------------| | Contracts | New customer agreements | >$100,000 | Yes | | Contracts | New vendor agreements | >$100,000 | Yes | | Contracts | Contract amendments | Material terms | Yes | | CapEx | Equipment purchases | >$50,000 | Yes (unless budgeted) | | CapEx | Facility improvements | >$25,000 | Yes | | Personnel | New hires | >$85,000 salary | Yes | | Personnel | Terminations | >$75,000 salary | Yes | | Personnel | Compensation changes | >10% increase | Yes | | Financial | New debt | Any | Yes | | Financial | Distributions | Any | Yes | | Pricing | Customer price changes | >5% decrease | Yes | | Operations | New business lines | Any | Yes |

Forty-seven specific covenants were extracted and tracked.

Phase 2: Weekly Monitoring

Each week, the seller provided updates including:

• New contracts entered
• Capital expenditures made
• Personnel changes
• Financial transactions
• Any other material decisions

Mage analyzed these updates against the covenant framework, flagging any activity that approached or exceeded thresholds.

Week 3 Discovery: Equipment Purchase

During week 3, the seller reported routine equipment purchases totaling $67,000. Mage flagged one item: a $58,000 specialized mixing system.

Issue: The equipment exceeded the $50,000 CapEx threshold and was not in the approved capital budget.

Resolution: The seller had assumed the purchase was routine operating equipment. When the buyer raised the covenant issue, the seller agreed to defer the purchase until after closing, when the buyer could make the investment decision.

Week 6 Discovery: Vendor Contract

During week 6, the seller entered a new 3-year vendor agreement for chemical packaging services.

Issue: The contract value was $340,000 over 3 years, with annual minimums of $113,000—above the $100,000 threshold requiring consent.

Resolution: The seller had not calculated the full contract value when signing. The buyer reviewed the contract terms and, finding them reasonable, provided retroactive consent rather than requiring the seller to unwind the agreement.

Week 10 Discovery: Sales Agreement

During week 10, the seller renewed a major customer agreement with modified pricing terms.

Issue: The renewal included a 7% price reduction for the customer's largest product category—above the 5% threshold requiring consent.

Resolution: This was more significant. The buyer analyzed the customer's volume and determined the price reduction would reduce annual gross margin by approximately $180,000. The parties negotiated:

• Buyer consent to the pricing change
• Purchase price reduction of $450,000 (2.5x the annual margin impact) to compensate for the reduced value

Impact Analysis

Without ongoing monitoring, the three issues would likely have been discovered only at closing—or not at all:

| Issue | Discovery Without Monitoring | Likely Outcome | |-------|------------------------------|----------------| | Equipment purchase | Post-closing | Buyer inherits $58K commitment | | Vendor contract | Post-closing | Buyer inherits $340K commitment | | Pricing change | Post-closing | Buyer inherits $180K/year margin reduction |

Total avoided exposure: approximately $2.3M in present value impact that the buyer would have inherited without pre-closing discovery.

The Pre-Closing Process

As closing approached, Mage generated a comprehensive covenant compliance summary:

| Category | Items Reviewed | Issues Flagged | Resolution | |----------|---------------|----------------|------------| | Contracts | 89 | 2 | Consent (1), Deferred (1) | | CapEx | 34 | 1 | Deferred | | Personnel | 12 | 0 | — | | Financial | 8 | 0 | — | | Pricing | 23 | 1 | Consent + price adjustment | | Operations | 15 | 0 | — | | Total | 181 | 4 | Resolved |

The compliance summary became part of the closing checklist, documenting that all covenant issues had been identified and addressed.

The Closing

Closing proceeded on the originally scheduled date with:

• All identified covenant issues resolved
• Price reduction of $450,000 reflecting the pricing covenant impact
• Clean bring-down certificate from the seller confirming no undisclosed breaches
• Buyer confidence that the business being acquired matched the business that was negotiated

Lessons Learned

Operating covenants require monitoring, not just drafting. Comprehensive covenants in the purchase agreement are worthless if breaches go undetected. The interim period requires active oversight.

Threshold breaches are often unintentional. The seller in this case did not deliberately violate covenants. The breaches occurred because operating personnel were not tracking contract values against purchase agreement thresholds. Early detection allowed collaborative resolution.

Price protection matters for covenant breaches. The pricing covenant breach resulted in a $450,000 price reduction—appropriate compensation for the buyer's reduced expected value. Without detection, the buyer would have absorbed this loss silently.

AI enables practical monitoring. Manually comparing 181 seller activities against 47 covenants would require significant attorney time weekly. Mage's automated analysis made weekly monitoring practical rather than aspirational.