During the frenzied period before execution of an acquisition agreement, a seller will be overwhelmed with pressing tasks, so the terms of the buyer’s financing may not be front of mind. There is good reason for this since it is not the seller’s debt and many of the financing terms will apply only after the acquisition closes. But there are some terms of a buyer’s financing that it is crucial for sellers to review in order to ensure that closing of the deal is as smooth as possible. This article will discuss in-depth three of those crucial terms.

Conditionality -

Sellers should align the conditions to the financing with the conditions to the acquisition as closely as possible. This limits the chances of a situation in which the parties have completed all conditions to close the acquisition, but the transaction cannot close because the buyer’s financing is unavailable due to extra conditionality. (The question of which party bears the risk of such a situation will be hashed out in the purchase agreement, but, regardless of whether there is a financing out, it is still a poor outcome for a seller to invest significant resources into an acquisition that never closes.) By way of example, consider the target material adverse effect condition (referred to as an MAE). The definition of an MAE in an acquisition agreement typically has more exceptions and a more limited scope and duration than in a loan agreement. But, in order to limit conditionality, the definition of target MAE for purposes of the MAE condition to initial funding should mirror the definition in the acquisition agreement.

Originally published in The Secured Lender - March 2020.