The draft Letter of Intent contains a broad Material Adverse Change clause that allows the buyer to walk away if our industry experiences any macro-level downturn during the diligence period. How do we narrow the definition of MAC to protect our transaction from broader market trends?

Question

Tyler Smith · Accepted Answer

A broad Material Adverse Change clause in a Letter of Intent is a quiet deal killer. If the clause is written to include general economic downturns, industry-wide declines, or changes in regulatory environments, the buyer can use any negative headline to walk away from the transaction or demand a massive price reduction.

You must narrow the scope of the MAC clause before signing the Letter of Intent. The clause should only be triggered by events that disproportionately and specifically affect your business, not the industry or economy as a whole. For example, losing your largest customer or experiencing a catastrophic data breach could qualify as a MAC, but a general rise in interest rates or a sector-wide correction should not.

Furthermore, define a clear financial threshold for what constitutes material. Specify that a change is only material if it causes a permanent reduction in your adjusted EBITDA of fifteen percent or more over a sustained period of at least ninety days. Keep your leadership team focused on hitting your quarterly Rocks and maintaining your Level 10 Meeting discipline to ensure your operational metrics remain strong, leaving the buyer no room to trigger even a narrowed MAC clause.