Acquisition Financing Review: How to Read an Offer

An acquisition financing review starts with a funding offer, a document that says less than it appears to. Most of it is conditional, some of it expires, and the binding parts are rarely what a buyer reads first.

This page covers how to read one properly: which words signal a commitment and which signal intent. It also covers what to confirm before you rely on any of it in a negotiation with a seller.

Identify the financing document

A term sheet usually summarizes proposed terms; a commitment letter sets out a lender’s commitment and its conditions; and a credit agreement (also called a loan agreement) sets out the definitive loan terms. A term sheet or commitment letter can contain provisions that bind before the credit agreement is signed, so read the language on binding effect, conditions, and signatures rather than relying on the document’s title.

A commitment letter may still leave funding subject to conditions precedent. Check which document makes each promise, what conditions remain, and which terms will carry into the signed credit agreement.

What to take away

Three kinds of statement in one letter

Indicative. A view of what the institution might do, based on what it has been told. It commits nobody, and language like subject to credit approval or in principle marks it. Useful for shaping a search; worthless as a promise to a seller.

Conditional. A real decision that takes effect when listed conditions are met: a valuation, a satisfactory review of the accounts, security in place, consents obtained. Most offers live here, and the conditions are where the work is.

These are commonly called conditions precedent: matters the lender requires to be satisfied or waived before funding. Check the actual list for executed credit and security documents, satisfactory diligence, required UCC or lien searches and filings, landlord waivers where required, and company or third-party consents.

UCC Article 9, as enacted in applicable state law, governs many security interests in personal property. A UCC financing statement filing is one common perfection method, but the requirements depend on the collateral and applicable law; confirm the specific searches and filings with counsel.

Committed. Binding on the lender, usually narrow, and usually dated.

Test the wording, not just the heading: “subject to credit approval” or “in principle” signals that approval is not final; “subject to satisfaction of conditions precedent” means funding remains conditional; and “the lender commits to lend, subject to [listed conditions]” is still limited by those conditions. These are illustrative phrases, not a substitute for checking the signed document and its full terms.

A buyer who tells a seller that funding is agreed while holding a document of the first kind will be found out at exactly the wrong moment. The acquisition financing page explains why sellers are entitled to test this before granting exclusivity.

Reading the conditions

Take the condition list and, for each item, write down who must act, what they must produce, and roughly when it can be started. Three patterns matter.

Conditions you control, such as providing documents, are only a scheduling problem. Conditions the seller controls, such as producing records or obtaining a landlord's consent, need to be raised with them early, because the request will otherwise arrive as a surprise mid-process. Conditions no one controls, such as an issuing body's decision on a license, decide your timetable.

Also find the expiry. Credit approvals and valuations do not last indefinitely, and a renewal brings the business's more recent trading into the file. A slow consent can therefore change your terms without anyone renegotiating anything.

The clauses that bind before anything is drawn

Some undertakings take effect the moment you accept, long before the loan agreement itself is signed. Read the term sheet and commitment letter for provisions that bind on acceptance, then compare them with the signed credit agreement; the document labels alone do not establish what is binding. In the credit agreement, locate the representations and warranties (statements about the borrower or business), covenants (ongoing promises), events of default (triggers for lender remedies), and any guarantee (who is liable for whose obligations).

For each fee, record the exact dollar amount, due date, whether it is earned or refundable, and whether it remains payable if the deal does not close. If the offer does not state an amount, get the figure in writing before acceptance and note the dated document that supplies it; do not treat a fee label as an estimate.

What the offer says about the business

An offer letter is also a document about the target, and it is worth reading that way.

What earnings figure did they use, and which of the seller's adjustments did they accept? What did they lend against: the trading, the assets, or your own position? What did they exclude from security, and why?

If the amount is lower than you expected, the answer is usually in one of these lines. It is telling you something the diligence team should look at. A lender's caution about a customer concentration or an unassignable lease is a finding, arrived at free.

It is also not an endorsement of the price. A lender advancing against a figure has decided the loan is safe, not that the purchase is sensible; the valuation methods guide explains why those are different questions.

Reviewing your own plan against the offer

Common questions