Summary
Learn how business value can quietly erode in the period between signing an acquisition agreement and closing the deal, and why effective interim management, monitoring, and covenants are critical to preserving deal value.
Most search funders think about value protection as something that happens during due diligence and then again, briefly, in the warranties negotiated at signing. What gets less attention is the period in between, the weeks or months after a price has been agreed and before the transaction actually closes, during which the business itself is still operating, still changing, and still capable of becoming a different proposition than the one the price was based on.
This gap is not a formality. It is a window in which real value can erode, sometimes through nobody’s deliberate fault, and a search funder who has not thought carefully about how to manage it can find themselves closing on a business that is meaningfully different from the one they agreed to buy weeks earlier.
In this article:
- Why seller attention shifts after signing
- How customer relationships begin to weaken pre-close
- Working capital drift and cash conversion deterioration
- Team retention risk during uncertainty periods
- What effective interim covenants look like
- Why continuous monitoring beats final-point validation
Why Seller Attention Naturally Drifts After Signing
Once a seller has agreed a price and signed a letter of intent, something predictable happens to their relationship with the business. The deal is, in their mind, substantially done. The hard work of negotiating value has concluded. What remains feels procedural rather than consequential, and that shift in psychology often translates into a genuine shift in attention.
A seller who has spent decades nurturing key customer relationships personally may begin, consciously or not, to step back from those relationships once the sale feels settled. A seller who has been disciplined about cost control throughout the sale process, in part because they understood that the numbers were under scrutiny, may relax that discipline once the scrutiny feels complete. None of this typically reflects bad faith. It reflects a natural human response to having reached what feels like the conclusion of a long and demanding process, even though the business itself has not yet actually changed hands.
The practical consequence is that the period between signing and close is often when the seller’s engagement with the business is at its lowest point of the entire sale process, even though the business still needs to perform consistently with the figures the price was based on. A search funder who assumes that signing means the hard part is over, for the seller as much as for themselves, is making an assumption that the data rarely supports.
The Specific Ways Value Quietly Erodes
The erosion that happens between signing and close rarely announces itself as a single dramatic event. It tends to accumulate through several specific channels, each individually modest but collectively capable of meaningfully changing the business being acquired.
Customer relationships are often the most significant channel. A key customer relationship that depended on regular personal contact from the seller can begin to cool the moment that contact becomes less frequent, even before the customer is formally told the business has changed hands. By the time the buyer takes over and attempts to rebuild the relationship from a standing start, some of the goodwill that existed at the point of signing may already have quietly diminished.
Working capital is another common channel, and one that often moves in a less favourable direction than the equivalent movement search funders worry about in the run up to a sale. A seller managing the business with reduced attention may allow receivables collection to slip, may delay supplier payments less aggressively than before, or may simply stop optimising the cash position the way they did when a buyer was actively scrutinising the numbers. The completion accounts mechanism is meant to address exactly this risk, but only if it is structured around an accurate understanding of what normal looks like, and only if the actual movement between signing and close is tracked carefully enough to be caught.
Team morale and retention risk also tend to shift during this period, particularly once employees become aware, formally or informally, that ownership is changing. Key staff who were quietly considering other opportunities may decide that a period of acquisition uncertainty is the right moment to act on those plans, and a seller whose attention has shifted away from the business is less likely to notice or address that risk before it becomes a departure.
What a Well Structured Interim Period Actually Looks Like
The search funders who manage this period well treat it as an active phase of the transaction rather than a passive waiting period. They build specific mechanisms into the agreement that keep both parties focused on the business’s continued performance, rather than allowing the natural drift in attention to go unaddressed.
Interim covenants are the most direct tool available. These are specific commitments written into the agreement that require the seller to continue operating the business in the ordinary course, to maintain customer relationships at a defined standard, to avoid taking on new debt or making material changes to staffing without consent, and to provide regular updates on financial performance through to close. A well drafted set of interim covenants gives the buyer both a clear standard to hold the seller to and a contractual basis for addressing any deviation from it.
Regular reporting through the gap period is the second important mechanism, and one that is often underused. A buyer who requests monthly management accounts and key operational metrics through the interim period, rather than waiting until close to look at the numbers again, gives themselves the opportunity to catch deterioration early enough to act on it, whether that means raising a concern with the seller, adjusting the completion accounts expectations, or in a serious case, reconsidering whether to proceed on the agreed terms.
| Erosion channel | What typically happens | How it is best protected against |
|---|---|---|
| Customer relationships | Reduced personal contact from a seller whose attention has shifted | Early introduction programme and interim covenant requiring continued customer engagement |
| Working capital | Less disciplined collections and payables management once scrutiny eases | Monthly management accounts requested through the interim period, not just at close |
| Team retention | Key staff act on existing plans once ownership change becomes known | Retention arrangements agreed and communicated before uncertainty has time to settle in |
| Operational discipline | General relaxation of the standards maintained during active due diligence scrutiny | Interim covenant requiring operation in the ordinary course, with regular reporting against it |
Why Continuous Monitoring Matters More Than a Single Final Check
Many search funders treat the period between signing and close as something to be revisited once, near the end, with a final review of the most recent accounts before the transaction completes. This approach tends to catch only the most dramatic deterioration, and often catches it too late to do much about it constructively.
A more effective approach treats this period the same way thorough due diligence treats the original data room, as a continuous process of monitoring rather than a single point in time check. Each new set of management accounts received during the interim period is an opportunity to compare current performance against the baseline established at signing, looking specifically for the early signs of the erosion channels most relevant to this particular business. A business with significant customer concentration warrants particular attention to any change in the pattern or tone of customer communication. A business with previously identified working capital sensitivity warrants close tracking of receivables and payables movement through every reporting period that becomes available.
Kudra supports this continuous comparison by maintaining the baseline established during due diligence and comparing each new piece of information received through the interim period against it, surfacing deviations as they appear rather than requiring the search funder to manually reconstruct the comparison each time new accounts arrive.
References
- https://hbr.org/2019/05/the-value-of-customer-relationships
- https://www.lw.com/thoughtLeadership/ma-representations-warranties-covenants
- https://www.investopedia.com/terms/l/letterofintent.asp
- https://www.investopedia.com/terms/w/workingcapital.asp
- https://www.pwc.com/gx/en/services/deals.html
- https://www.mckinsey.com/capabilities/m-and-a/our-insights
