By Sarah Tune
In an ideal buyer’s world, every potential buyer or bidder in an auction would be able to negotiate a full financing contingency as a closing condition to an acquisition. However, in a competitive bidding scenario or even in a scenario where the seller has considerable leverage in the transaction, a buyer sometimes must forgo the full financing contingency. A buyer may also choose to forgo the full financing contingency if it has room under its existing facilities and would prefer to use its bargaining power elsewhere.
Unless the buyer is sitting on a pile of unrestricted cash, this means the buyer will need to borrow from existing facilities or at least collateralize the newly acquired assets. In multi-unit restaurant acquisitions, this normally means mortgages, lender’s title insurance, SNDAs, and landlord agreements, in addition to the lender checking the box on such items as insurance, certificates of occupancy, and liquor and health licenses. Without these items as closing conditions, the buyer may face a situation in which the seller has delivered all of the buyer-seller closing deliveries, but the buyer would be closing into a default under its loan agreements. In addition, even if the loan agreements allow a period of time after closing for the buyer to obtain all of the required documentation, a significant amount of momentum, leverage, and incentive is lost after closing.
The “mini-financing contingency” is a method buyers can use to ensure they will be able to meet the lender’s conditions at closing. Unlike a standard financing contingency, the mini-financing contingency does not allow the buyer to walk if it cannot find financing; rather, it only allows the buyer to refuse to close unless and until all items on an enumerated list have been delivered. This list should be developed directly from the buyer’s loan agreements. Compare the two versions:
Regular financing contingency
“Buyer shall have received the financing on the terms provided for in the commitment letter of [Bank], dated as of [date] attached hereto as Exhibit A.” [Note that the definitive agreement may also contain representations and warranties of the Buyer with respect to the Commitment Letter.]
Option 1: “Buyer’s lenders’ underwriting requirements for the pledge of new collateral, each of which is identified on Schedule A, pursuant to that certain [credit agreement] shall be satisfied with respect to each Restaurant.”
Option 2: “The conditions on Schedule A shall be satisfied with respect to each Restaurant.”
In both options, Schedule A should match exactly the lender’s requirements under the credit agreement. The difference in the two options--a difference that has more “optical” than legal significance--is that one mentions the lender and credit agreement and the other does not.
The key to successfully negotiating the mini-financing contingency is to present these enumerated items as buyer conditions and not just the lender’s conditions, since a seller will be wary of a lender’s discretion. The buyer should include as many of these items as possible as due diligence requests, and negotiate them as conditions to closing early in the process.