A purchase agreement and a financing commitment are two separate contracts with two separate sets of conditions, and the buyer is the party caught between them. If the seller can force a closing but the lender can walk away, you carry the risk. Acquisition finance is the work of closing that gap: lining up debt that will be there on the closing date, on terms the combined business can live with afterward. We represent buyers, including strategic acquirers and founder-led companies making a first acquisition, and we coordinate the financing with the M&A documents from the letter of intent forward.
When Acquisition Debt Comes Into Play
The question arises as soon as a buyer decides it cannot or should not pay all cash. The sources vary with the size of the deal: a senior term loan and revolver from a bank or direct lender, a second lien or mezzanine tranche priced higher and often carrying warrants, seller financing in the form of a subordinated note, an earnout, and sometimes rollover equity. Each source brings its own conditions, collateral demands, and timeline. The financing also has to address the target's existing debt, which is usually paid off at closing through payoff letters and lien releases, along with any target debt the buyer intends to keep in place.
Commitment Letters And Certain Funds
The commitment letter, with its term sheet and fee letter, is the lender's promise to fund, and its conditions precedent are what matter most. Under SunGard or certain-funds language, the conditions to funding are narrowed to line up with the purchase agreement. The only representations that must be accurate at closing are the purchase agreement representations whose breach would let the buyer terminate, plus a short list of specified representations about the borrower. Collateral perfection beyond UCC filings and delivery of stock certificates can be finished after closing. We also negotiate market flex, which lets arrangers change pricing or structure to syndicate the loan, and an expiration date that outlasts the purchase agreement's outside date.
Building The Capital Structure
We help buyers decide how much debt the target can carry and in what layers, and then we negotiate the documents. On the senior side, that means the credit agreement, the guaranty and security package covering the target after closing, and the covenants that will govern the combined company. Where there is mezzanine or second lien debt, the intercreditor agreement sets payment and lien priority, the standstill period before a junior lender can enforce, and limits on amending senior terms. For seller notes, we draft subordination terms the senior lender will accept without leaving the seller a note that is worthless. Throughout, we keep the financing definitions consistent with the purchase agreement.
When The Financing Falls Apart
Disputes in acquisition finance usually come from gaps between the contracts. A lender may claim a material adverse effect, a failed condition, or an inaccurate representation to avoid funding. A seller may sue a buyer that cannot close, and under many purchase agreements the remedy is a reverse termination fee or specific performance conditioned on the debt being available. After closing, disputes shift to earnout calculations, set-off against seller notes for indemnity claims, and intercreditor fights if the business underperforms. With our litigation practice, we evaluate these claims under the actual contract language, including the Xerox provisions many purchase agreements use to limit the seller's direct claims against the lenders.
Practical Steps And Common Mistakes
Start the financing conversation before the letter of intent is signed, because the LOI often fixes the price and timeline the financing has to meet. Read the purchase agreement and the commitment letter side by side, and match the conditions, the outside date, and the defined terms. Watch for a financing condition the seller will reject, or a reverse termination fee you cannot afford. Run diligence on the target's IP, key contracts, and existing liens early, since a lender will require a clean collateral package and a change of control can trigger consent rights in customer and license agreements. And test the covenants against realistic projections for the year after closing.
