Definition - What does Financing Contingency mean?
The financing contingency is usually included in the letter of intent (LOI) which will stipulate the date when financing is expected to be finalized (typically not more than a few days prior to close). Sometimes, the financing contingency may refer to specific terms that need to be in place rather than whether the financing can or cannot be obtained. These terms may include securing a specific rate or amortization schedule to provide for the buyer's return modeled in the target's valuation.
Divestopedia explains Financing Contingency
If the transaction is being conducted with a corporate buyer, the seller should review the buyer's balance sheet to determine how much debt the buyer already has, and if additional financing capacity is available. If a financial buyer such as a PE firm is being considered, the seller should review the PE firm's track record of closing transactions, and whether the fund being used has committed capital available and a dedicated banking facility.
There are some buyers including PE firms that look to tie target companies to an LOI, and then go seek the capital to close the transaction relying on the financing contingency as an out. It is best for sellers to stay away from buyers that operate this way.
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