Keepwell Agreement

It’s not easy being a parent company, but here at Coolest Conglom, Inc., we try to take care of our subsidiary companies. We help out with their debt. We invest in their projects. And in some cases, like with our newest subsidiary, Lit Llamas (trendy llama-themed gear for the outdoor enthusiast, of course), we even enter into keepwell agreements.

A “keepwell agreement” is basically an agreement between a parent company and a subsidiary saying that the parent company is going to take care of all the subsidiary’s expenses and financial obligations for a given period of time.

We know that Lit Llamas has a solid business plan—who wouldn’t want a 40-liter waterproof hiking backpack with adorable smiling llamas all over it?—but we also know that their current capital isn’t going to carry them through their new product launch, so we make them a deal: Coolest Conglom will cover all their expenses and make sure their equity ratio is solid for the next twelve months. In addition, we promise to back any additional loans or financing they need to secure within that period. Not only does this mean Lit Llamas will be able to get their product line off the ground, but it also means they’ll look better to outside investors, since Coolest Conglom has their financial back.

If this sounds like a superb deal for Lit Llamas, it is. The only thing those llama-loving business folk need to be aware of is that keepwell agreements are usually not legally binding. If, for some reason, Coolest Conglom decides not to honor the agreement, Lit Llamas and its shareholders can come after them for reneging, especially if that renege ends up causing Lit Llamas to default on payments it owes. But depending on the terms of the agreement, they might not get too far.