Make the Deal

CHAPTER 12 Financing Risk

History of Financing Provisions

Many buyers need some form of debt financing to pay the purchase price in a cash deal, and possibly to refinance debt of the target and pay deal expenses. At signing, the buyer’s ability to obtain debt financing at closing is never certain. The financing provisions of an acquisition agreement address what happens if debt financing is not actually available to the buyer at closing. The number of deals using debt to finance some or all of the purchase price, and the amount of leverage used, fluctuates depending on market conditions and credit availability.

An overview of the history of financing provisions will help describe their current status. Private equity firms started out in the 1980s frequently having the benefit of a clean “financing out” condition, with no guarantee of performance or financing by the private equity fund. If debt financing was not available, the private equity fund could refuse to close, without owing any fees or damages. Private equity firms at the time frequently offered substantial premiums over the price that a strategic buyer could pay. This generally gave private equity firms meaningful leverage in negotiating with targets.

Over time, private equity firms began agreeing to pay fund-guaranteed reverse breakup fees to the target in the event that the deal could not close because the buyer could not obtain debt financing. In some cases, private equity firms also began providing limited fund ...