A private equity buyer submitted an LOI with a strong enterprise value, but the offer is subject to a sixty-day debt financing contingency with no financing commitment letter attached. How should we handle debt financing contingencies to avoid getting re-traded?

Question

Tyler Smith · Accepted Answer

A high headline enterprise value paired with an uncommitted financing contingency is not an offer, it is an option on your business. Private equity sponsors frequently use uncommitted Letters of Intent to tie up a seller in exclusive diligence, shop the deal to lenders, and then re-trade the purchase price downward when debt terms come back tighter than expected.

To protect yourself, refuse exclusivity until the buyer delivers institutional proof of capital. Demand executed debt commitment letters or highly confident letters from recognized lending partners that outline leverage parameters, interest coverage ratios, and lending caps. The buyer should also prove they have sufficient uncalled fund capital to cover the equity contribution.

Second, tighten the exclusivity period. Sixty days of open-ended financing diligence is too long. Grant no more than thirty days of exclusivity, conditioned on the buyer delivering credit committee approval within twenty-one days. If they fail to hit that milestone, exclusivity immediately terminates, allowing you to re-engage backup bidders.

Finally, require a non-refundable ticking fee or earnest money deposit held in escrow if the diligence window extends beyond forty-five days due to buyer financing delays. Strong buyers with real balance sheets and proven lender relationships will agree to these boundaries. Sponsors looking to syndicate debt at your expense will balk, which gives you all the information you need.