Meaning
Contractual restrictions embedded within purchase agreements or credit facilities obligate target company leadership to conduct daily business strictly consistent with past practice. Legal practitioners apply ordinary course covenants to prevent management from depleting corporate working capital or making non-standard employment commitments prior to deal closing. These stipulations govern capital expenditure budgets and vendor commitments between signing and closing.
The obligation ceases upon final equity closing or formal transaction termination.
Operational Constraint
Preserving standard operating procedures prevents corporate leadership from pivoting during unexpected market downturns or sudden competitive threats. Under ordinary course covenants, even beneficial commercial choices such as restructuring sales compensation or executing long-term supplier agreements require buyer approval. Seeking external consent for routine adjustments imposes measurable managerial friction on operating founders.
Executive capacity gets expended drafting formal waiver requests and awaiting buyer legal feedback rather than steering core operations.
Interim Paralyzation
Extended intervals between contract execution and closing create internal paralysis as department heads hesitate to make operational commitments that might violate legal definitions of standard practice. Strict compliance with ordinary course covenants dampens organizational initiative when customer requests demand custom contractual terms that require counterparty review. The founder operating the executive seat absorbs intense frustration, watching commercial opportunities slip away while locked into historical business practices.
Managerial hours shift toward defensive documentation to demonstrate compliance with baseline covenants, weakening competitive positioning before new ownership takes over.
Liability Exposure
Unilateral modifications to corporate operations expose the selling company and founding leadership to breach claims or transaction termination rights. Strict ordinary course covenants grant acquirers contractual advantage to renegotiate purchase prices if business deviations occur during the interim closing period.
