Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / The M&A Financing Condition Trap That Cost a Seller 25 Million
Transcript
- Lucas: Let me tell you about a seller who left twenty-five million dollars on the table because of a financing condition that seemed like boilerplate. Luna: Twenty-five million? That's a serious number. What happened? Lucas: The target was a mid-market manufacturing company in the Midwest—strong cash flows, loyal customer base, the whole package. Two potential buyers showed up. One offered all-cash for fifty million. The other offered fifty-five million but said they'd need debt financing to close. Luna: So the seller went with the higher offer, assuming the financing would be a formality. Lucas: Exactly. The purchase agreement included a standard financing condition—the buyer had to use 'reasonable best efforts' to secure loans. The seller's lawyer said not to worry, it's just a backup. But when interest rates climbed two hundred basis points during the exclusivity period, the buyer's bank pulled the term sheet. Luna: Couldn't the buyer have used its own cash? I mean, if they valued the company at fifty-five million... Lucas: They could have. But the buyer's internal policy was to lever acquisitions. So they invoked the financing condition and walked away. The seller had already terminated negotiations with the all-cash buyer. That twenty-five million difference? Vanished. Luna: Wait—the seller had a clear bird in hand and chose to chase a riskier offer. But the real trap seems like it was in the wording of the condition. 'Reasonable best efforts' didn't require the buyer to use its own equity. Lucas: Right. And the seller didn't negotiate for a reverse breakup fee or a deposit. In many deals, if the buyer can't get financing, they still pay a penalty—maybe three to five percent of the purchase price. Here, there was no cost to walking. Luna: So the seller's lesson is pretty clear: any financing condition should have a deadline, and you need a 'certain funds' clause or a waiver mechanism. Lucas: Yes. For example, you can say: 'The buyer must waive the financing condition within twenty-one days of signing, or the seller gets a seven-figure breakup fee.' That forces the buyer to actually line up their financing before you take the business off the market. Luna: But don't buyers resist that? They argue that financing conditions are standard. Lucas: They do. But a savvy seller can push back—especially if there's another offer on the table. In this case, the seller had leverage and didn't use it. The competing all-cash offer was real. They could have demanded the buyer put up a non-refundable deposit to compensate for the risk. Luna: Let me guess: the buyer refused, and the seller didn't force the issue. Lucas: Exactly. They were so focused on the higher price that they ignored the probability of closing. And that's the core of this trap—it's not just legal language, it's deal psychology. Lucas: If these conversations have moved your work forward in some small way, a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo. That's literally what funds making this many of these. Luna: Yeah, it's a small group that keeps the show ad-free, and we're grateful for that. Helps us dig into cases like this without worrying about sponsors. Lucas: So back to the financing trap. Another way sellers can protect themselves is by demanding a 'financing out' that requires the buyer to exhaust all reasonable sources of capital—including their own balance sheet. Luna: Meaning if the buyer has the cash, they can't just walk and blame the bank. That's a big shift. Lucas: Right. And often, private equity firms have a fund-level credit facility they can tap. If the purchase agreement says 'reasonable best efforts' must include drawing on that facility, it closes the loophole. Luna: But in the case you mentioned, the buyer's policy was to use acquisition financing for every deal. Could that have been disclosed in due diligence? Lucas: It's possible, but the seller didn't ask. The key is to probe the buyer's financing history. Have they ever used equity to close? Have they walked away from a deal due to financing conditions before? The data room isn't just about the target—it's about the buyer too. Luna: So the seller could have discovered this pattern and insisted on a condition that the buyer must fund at least fifty percent of the purchase price from equity. Lucas: Exactly. Or they could have asked for a 'failure to fund' clause that gives the seller the right to sue for specific performance—forcing the buyer to close. That's rare but possible in a seller's market. Luna: Let's talk about the numbers. The seller lost twenty-five million. But what if they had negotiated a three percent reverse breakup fee? That would be about one point six five million—not the full price, but better than zero. Lucas: Sure. And it would have compensated for some of the legal fees, management distraction, and the opportunity cost of losing the other buyer. Sellers should always have a floor. Luna: What about the 'material adverse change' angle? Could the seller have argued that rising interest rates don't excuse the buyer because it's a common market shift? Lucas: That's a different clause. The MAC clause typically excludes changes in general economic conditions. So that wouldn't help the seller here. The financing condition is separate—it's about the buyer's ability to get loans, not the business itself. Luna: So it's really about the buyer's creditworthiness, not the company's performance. Lucas: Right. And that's why sellers need to vet the buyer's financing sources early. If a buyer needs debt, ask for a commitment letter from their bank before signing. If they can't get one, or it's conditional, that's a red flag. Luna: But many buyers won't get a commitment until after signing because it costs money. Lucas: True. So the next best thing is a tight timeline for the financing condition to be satisfied. The longer the period, the more risk the seller bears. Thirty days is typical. Sixty is dangerous. Luna: And the seller should never let the buyer drag out the exclusivity period while they shop for loans. Lucas: No. The exclusivity should be tied to the financing condition being waived or fulfilled. If the buyer hasn't secured loans within two weeks, the seller should be free to talk to other bidders. Luna: That would have protected the seller in your story. If the all-cash buyer had known the debt-backed offer wasn't certain, they might have stayed at the table. Lucas: Or even upped their bid. But by handing over sixty days of exclusivity with no commitment, the seller gave away all leverage. Luna: So the biggest takeaway: don't let a financing condition become a free option for the buyer. Lucas: Exactly. And if you're a seller, remember that price isn't everything—certainty of closing is worth millions. The all-cash offer at fifty might have been the better deal after adjusting for risk. Luna: It's a tough lesson, but hopefully our listeners can avoid it by negotiating smarter. Lucas: That's the goal. Next time we'll look at another trap—maybe the earnout accounting trap that cost a seller eighteen million in a different way.