The buyer wants to include a broad Material Adverse Effect clause in our Letter of Intent that allows them to walk away if our monthly revenue dips during diligence. How do we narrow this MAC definition to prevent seasonal dips or industry shifts from killing the deal?

Question

Tyler Smith · Accepted Answer

A broad Material Adverse Effect clause gives the buyer a free option to walk away or re-trade your purchase price if your business hits a temporary bump during the exclusive diligence period. You must narrow this definition during the Letter of Intent stage, not wait for the purchase agreement. First, establish a high quantitative threshold. A minor dip in monthly revenue is normal. Define a material adverse effect as a sustained decline in EBITDA or revenue of at least fifteen to twenty percent compared to the same period in the prior year, measured over a trailing three-month period. This prevents a single slow month from triggering a breach. Second, negotiate standard industry carve-outs. Any declines caused by general economic conditions, industry-wide downturns, changes in law, or the public announcement of the transaction itself must be explicitly excluded from the MAC definition. If the entire sector dips but your business maintains its relative market share, the buyer should not have the right to walk. Keep your leadership team focused on their weekly measurables and quarterly Rocks during this transition. The best defense against a MAC trigger is maintaining operational momentum and proving the predictability of your business engine while the lawyers finalize the paperwork.