A financing contingency should name the financing it depends on: the amount of senior debt and any subordinated layer, the structure, the shortest acceptable maturity, a ceiling on pricing, what counts as obtaining the loan, and a realistic outside date tied to the lenders' process. It should also say what the buyer must do to pursue it. Vague language such as "subject to financing" invites a re-trade and reads to the seller as an option to walk. Specific terms anchored in lenders' indicative terms make the offer stronger, not weaker.
- What it protects
- The buyer's right to walk if the named financing is not available
- What it should name
- Amount, structure, maturity, pricing ceiling, outside date
- Best anchor
- Lenders' written indicative terms
- Satisfied by
- A commitment letter, not a term sheet
- Common seller asks
- Evidence of lender interest, evidence of equity, a firm outside date
Why "subject to financing" is not enough
Most of a letter of intent is non-binding, and the financing contingency is finally written into the purchase agreement. But the LOI is where it gets agreed in principle, and whatever the LOI says becomes the starting point for the lawyers. A contingency that says only "subject to financing" leaves every important question open. Financing of how much? In what structure? On what terms? By when? And what if lenders offer something close to, but not quite, what the buyer wanted?
An open contingency cuts both ways. For the seller, it is an option the buyer holds: any disappointment in diligence can be recast as a financing problem, and the buyer walks or asks for a lower price. Sellers and their advisors know this, so a vague contingency lowers the value of the offer in their eyes, and a competing buyer with a specific one looks more serious. For the buyer, vagueness is no protection either. If the only lender willing to lend offers less leverage, a higher spread or tighter covenants, the buyer has to argue about whether that counts as financing, from a weak position and late in the deal.
A specific contingency does two jobs: it tells the buyer exactly when they can walk, and it tells the seller exactly when they cannot.
What a buyer-protective contingency says
| Term | Vague version | Specific version |
|---|---|---|
| Amount | Subject to financing | Senior debt of not less than a stated amount, plus any subordinated layer and seller note of stated amounts |
| Structure | Not stated | A senior term loan and revolver, a unitranche, or senior plus mezzanine, with the seller note's subordination terms |
| Maturity and amortization | Not stated | Not shorter than a stated term, with scheduled amortization not heavier than a stated level |
| Pricing | On acceptable terms | Not more than a stated spread over a named base rate, with any upfront fees capped |
| Buyer's equity | Not stated | The equity amount and where it comes from: the buyer, a sponsor, co-investors, a seller rollover |
| What counts as obtained | Buyer obtains financing | A signed commitment letter on terms at least as favorable as those above |
| Buyer's effort | Not stated | Engage lenders within a stated number of business days of signing and pursue diligently |
| Outside date | Not stated | A fixed date, after which either party may terminate and any deposit is returned |
In drafting terms, the clause reads something like this: Buyer's obligation to close is conditioned on Buyer obtaining a signed commitment for senior debt of not less than [amount], maturing in not less than [term], at a spread not greater than [spread] over [base rate], on terms substantially consistent with the indicative terms dated [date]. Buyer will engage lenders within [number] business days and pursue the financing diligently. If no commitment is issued by [outside date], either party may terminate. The lawyers will refine it. The point is that every bracket is filled with a number the buyer has checked against lenders.
Two terms deserve care. The pricing ceiling should be the level at which the buyer's model still clears the lender's coverage test with room to spare, not a number picked for comfort. Conventional bank lenders commonly look for debt service coverage of at least 1.25x, and every point of spread comes out of that cushion. And what counts as obtained should be a commitment letter, not a term sheet. A term sheet is an invitation to underwrite, and a buyer who treats it as financing can lose the contingency's protection while the lender is still deciding. The difference is on term sheet vs commitment letter.
Where the terms come from: lenders' indicative terms
A contingency can only be specific if the buyer knows what financing is available before signing the LOI. That is the purpose of an early read from lenders: how much the business supports, in what structure, with how much equity beneath it. It is set out in talking to lenders before the LOI. A buyer who writes the contingency around written indicative terms can tell the seller that the financing in the LOI is one lenders have already looked at, which is the strongest thing a financed buyer can say.
Indicative terms are not a commitment, and nothing written before underwriting can be. But they narrow the gap between the contingency and reality to the things underwriting genuinely tests: whether adjusted EBITDA survives the quality of earnings, whether the working capital delivered is normal, what legal diligence finds. Midas Partners's lender book holds 1,800+ lenders, 1,148 of which write term and private credit. Once the documents are in, Midas Partners builds the full lender package in a day, and the indicative terms that come back from it are the ones the purchase agreement's contingency should track. What that package contains is on the package.
What else the LOI should settle for the lenders
Several deal terms change what lenders will lend, and a contingency that ignores them leaves the seller to discover them in the purchase agreement. The LOI should reflect each one:
- Quality of earnings. The price assumes an EBITDA figure. Say that the price is based on the seller's adjusted EBITDA as presented, subject to confirmation in diligence, so a material finding in the quality of earnings reopens the price instead of only the financing.
- Cash-free, debt-free and a working capital peg. Lenders size on a business delivered with normal working capital. State the basis, and that the peg will be set from the trailing monthly average; see the working capital peg.
- Seller note. State that it will be subordinated to the senior lenders on customary terms, with payments blocked on default and a maturity after the senior loan. See seller note subordination terms.
- Earnout or rollover. If part of the price is contingent or reinvested, say that its payments and any put or redemption rights will be subordinated to the loan.
- The seller's role after closing. Lenders want to know who holds the key relationships. A transition or consulting agreement written into the LOI answers that early.
How sellers push back, and how to answer
| Seller's request | What it is really asking | A reasonable answer |
|---|---|---|
| No financing contingency at all | Can this buyer actually close? | Show indicative terms and evidence of equity; keep the contingency, but narrow it |
| A short outside date | Will this drag on while I am off the market? | Tie the date to the lenders' steps, with an extension only if a lender is still working |
| Evidence of the equity | Is the money real? | A commitment letter from the sponsor or co-investors, or evidence of the buyer's funds |
| Buyer must accept any reasonable financing | Will the buyer hide behind small differences? | Accept financing within the stated terms; the ceilings define reasonable |
| Deposit or break fee at risk after a point | Is the buyer committed? | Acceptable once a commitment letter is signed, not before |
Every one of these requests is easier to answer with specific terms than with vague ones. A seller who can see the debt amount, lenders' indicative terms and the equity commitment has less reason to demand that the contingency be removed. Sponsor-backed buyers in competitive processes sometimes give up the contingency entirely; a buyer who does that should hold a signed commitment letter before signing the purchase agreement.
If the financing comes back short
With a specific contingency, a buyer who engaged lenders on time and pursued the financing diligently can terminate if no commitment within the stated terms arrives by the outside date. More often, the financing does not fail outright; it comes back different. A lender offers less debt because the quality of earnings trimmed EBITDA, or tighter covenants, or asks for more equity beneath its loan. The contingency then tells both sides where they stand. Terms inside the ceilings are financing the buyer must accept. Terms outside them give the buyer the choice to walk or to renegotiate.
Renegotiation usually uses one of five levers: a lower price, more equity, a larger seller note, a larger rollover, or a different structure such as a unitranche or a mezzanine layer. A seller who agreed to specific terms and sees a documented reason for the shortfall, such as a quality of earnings finding, is far more likely to move than one who is told, without evidence, that the bank would not lend. The common reasons lenders decline or cut an acquisition loan are on why acquisition loans get declined, and the full sequence from LOI to funding is on the acquisition financing process.
Common questions
- Does a financing contingency make my offer weaker?
- A vague one does, because the seller reads it as an option to walk. A specific one tied to lenders' indicative terms usually makes the offer stronger, because it shows the financing has already been looked at.
- Is the financing contingency in the LOI binding?
- Usually not; the LOI's business terms are normally non-binding. The binding contingency is the one in the purchase agreement, but it is drafted from what the LOI says.
- Should a term sheet satisfy the contingency?
- No. A term sheet is an invitation to underwrite, not an approval. The contingency should be satisfied by a signed commitment letter on terms within the ones it names.
- How long should the outside date be?
- Long enough for the lenders' diligence and the third-party work the deal needs, such as the quality of earnings and legal review. Build it from the lenders' process, not a round number, and allow an extension only while a lender is still actively working.
- What if the lenders offer less than the contingency names?
- The buyer may walk or renegotiate. The usual levers are the price, more equity, a larger seller note or rollover, or a different structure.