The buyer's draft of the asset purchase agreement includes a broad Material Adverse Change clause that allows them to walk away if there is any general decline in our industry before closing. How do we narrow this MAC clause to protect our deal from external market fluctuations?

Question

Tyler Smith · Accepted Answer

A broad Material Adverse Change clause gives the buyer an easy escape hatch if the broader economy or your specific industry experiences a temporary dip during the due diligence period. If you sign an agreement with a loose MAC clause, you bear all the market risk while the buyer holds a free option to walk away. You must negotiate a highly specific, narrow MAC definition before proceeding. Insist on carve outs that explicitly exclude general economic conditions, industry wide downturns, changes in regulatory environments, and natural disasters from the definition of a MAC. The clause should only be triggered if your business suffers a disproportionate, severe, and long term decline compared to your industry peers. To make this objective, define what constitutes a material change using clear financial thresholds. For example, specify that a material adverse change only occurs if your trailing three month EBITDA drops by more than fifteen or twenty percent compared to the same period in the prior year, and that this decline must be sustained for a set period. By tying the MAC clause to objective financial metrics and excluding general market noise, you keep the buyer focused on the actual performance of your business. Your weekly scorecard data will easily demonstrate that your business is highly resilient, preventing the buyer from using external economic news as an excuse to renegotiate your enterprise value or delay the closing.