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A financing condition (also known as a “financing out”) in an M&A acquisition agreement provides the buyer with a right to terminate the transaction (commonly known as a “walk right”) in the event that that the buyer is not able to secure financing to fund the acquisition. Traditionally, financing conditions have most commonly been employed by private equity buyers in leveraged buyouts where a substantial portion of the purchase price is borrowed.
By execution and delivery of an M&A acquisition agreement, a buyer commits to, among other things, deliver the purchase price and other closing consideration to the seller at closing. Where the buyer does not have sufficient funds on hand to finance the transaction, it must borrow funds to meet that obligation. Absent modification by the terms of the acquisition agreement, the buyer bears the risk of changes that might occur to the terms and availability of financing during the interim period between signing and closing. A financing condition reallocates this interim period risk by permitting the buyer to terminate the acquisition agreement if, at closing, financing is unavailable or available only on unfavorable terms.
At a high level, there are two main types of financing conditions: strict financing conditions and financing failure financing conditions:
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