PE & Earnout June 11, 2026 6 min read

Enforcing Earnout-Period Covenants in Private Equity Transactions

The post-close covenant period is where deal value is most often quietly destroyed. A short playbook for sponsors and their counsel.

By R. Ostrow, Counsel, Transactions Practice

The problem nobody puts in the deal memo

Sponsors negotiate elaborate Non-Compete, Non-Solicit, and No-Hire covenants from selling founders and key managers. These covenants then sit, unread, in a closing binder for two to four years until something goes wrong, at which point counsel discovers that:

The seller has been quietly building a competing product through a holdco affiliate.
Three of the five "key managers" already left for a former portfolio company executive's new venture.
Customer overlap with the new venture is meaningful, but no one was tracking it.

By the time this surfaces, the earnout has already been disputed and the litigation posture is reactive.

A workable monitoring framework

We recommend a four-quarter cadence for every deal where covenant value is material:

Quarter 1 post-close. Baseline subject inventory: every covenanted individual, their declared post-close activities, and any disclosed exemptions.
Quarterly. Open-source review for new corporate filings, domain registrations, LinkedIn role changes, and press mentions tied to each subject.
Annually. Customer overlap review against the seller's pre-close customer list. Even partial overlaps should be documented.
Trigger-based. Any earnout milestone, leadership departure, or major industry event re-runs the full sweep.

Where this gets thorny

Three areas demand counsel-led judgment, not just monitoring:

Family-network attribution. Spouses and adult children appearing as principals of competing entities is rarely a coincidence. Local statutory rules vary widely on whether and how those affiliations bind the original covenantor.
Investor overlap. A founder who personally invests in a competitor through a passive vehicle may not breach a Non-Compete on its face, but can create earnout-disruption claims.
Geographic creep. Remote work has eroded the meaning of "in the territory of." Plan to renegotiate or update enforcement theory rather than rely on 2018-era geographic language.

The sponsors who treat the covenant period as an active, monitored phase, with the same operational rigor as customer-success or financial reporting, recover materially more earnout value than those who treat it as paperwork.