Key takeaways
- Closing conditions are different from representations and warranties: reps are about the past, conditions are about the future state of the business at the time of closing.
- Material Adverse Change (MAC) clauses give buyers an exit if a defined deterioration occurs between signing and closing, typical MAC definitions exclude general economic conditions but include business-specific revenue declines of 15% or more.
- Regulatory conditions, including HSR Act pre-merger notification thresholds (currently $119.5M for 2024 filings), can add 30–90 days to a close timeline and create a window of deal uncertainty.
- Bring-down of representations requires that all reps remain true as of closing, not just as of signing, any material change between signing and close can trigger a failure to close.
- Sellers can reduce closing condition risk by negotiating limited MAC definitions, short exclusivity windows, and reverse termination fees that compensate sellers if buyers fail to close.
In this article
- What closing conditions actually are
- Material Adverse Change clauses: the most negotiated condition
- Regulatory conditions: HSR and other approvals
- Bring-down of representations at closing
- Financing conditions and reverse termination fees
- Escrow mechanics and closing condition risk allocation
- Practical steps for sellers to minimize closing condition risk
- Frequently asked questions about closing conditions
How to use this before a process
For adjacent context, compare this with What private equity buyers look for in middle market diligence and What Is a Data Room in M&A? Build It Early or Fund the Discount; the strongest operators connect these topics instead of treating them as separate workstreams.
Rule of thumb: if a buyer will ask for it in diligence, build it before the process. The same work costs less, creates more confidence, and carries more valuation benefit when it is completed before exclusivity.
Readiness Snapshot
What buyers will ask
Which terms change economics after the headline price is agreed?; What conditions let the buyer delay, retrade, or walk away?; Which obligations survive close and how are they capped?
What to prepare
Marked LOI or purchase agreement term tracker.; Economic impact summary for escrows, holdbacks, notes, and indemnities.; Approval, covenant, and closing-condition checklist.
87% of private company purchase agreements include a material adverse change condition
Financing conditions appear in roughly 20% of middle market deals
Bring-down of reps at closing is nearly universal in signed purchase agreements
When a purchase agreement is signed, the deal is not done. Signing creates a binding obligation to close, but that obligation is conditioned on a set of events that must occur and facts that must remain true between signing and closing. These are closing conditions, and they represent one of the most important but least-understood sections of any purchase agreement.
Founders who focus exclusively on price and deal structure sometimes miss the significance of closing conditions. A buyer can have a signed agreement at a $30M purchase price and still decline to close if a material adverse change occurs in the business, if regulatory approval is not obtained, or if financing falls through. Understanding which conditions apply to your deal, how they are defined, and what you can negotiate is essential to actually getting paid.
Signing to Close: Condition Checklist
What closing conditions actually are
Closing conditions are contractual prerequisites that must be satisfied before either party is required to close the transaction. Most purchase agreements include both buyer conditions (things that must be true for the buyer to be required to close) and seller conditions (things that must be true for the seller to be required to close). Buyer conditions almost always receive more negotiating attention because they are the more frequent source of deal failure.
The distinction between closing conditions and representations and warranties is critical. Representations are statements about the current and historical state of the business, what was true at signing. Closing conditions govern what must be true at the time of closing. A rep can be accurate at signing but a closing condition can still fail if circumstances change between signing and closing.
Scroll to see more →
The most seller-favorable deals eliminate financing conditions entirely and include a reverse termination fee, typically 3–5% of deal value, that compensates the seller if the buyer fails to close for reasons within the buyer's control.
Material Adverse Change clauses: the most negotiated condition
A Material Adverse Change (MAC) clause, also called a Material Adverse Effect (MAE) clause, gives the buyer the right to walk away from a signed deal if a defined deterioration occurs in the target business between signing and closing. MAC clauses are among the most heavily negotiated provisions in any purchase agreement because they define the boundary between market risk and deal risk.
MAC definitions typically include both a general statement of what constitutes a MAC and a list of exclusions. The exclusions matter as much as the inclusions. Standard exclusions include changes in general economic conditions, changes in the target's industry, changes in law or regulation, and effects of the transaction itself. What is NOT excluded: company-specific revenue declines, loss of key customers, loss of key employees, and material litigation.
15–20%
Typical revenue decline threshold
3–6 months
Signing-to-close window
5–15%
MAC exclusion litigation threshold
Courts have historically set a high bar for MAC invocations. In Delaware, where most private M&A is governed, MAC clauses are rarely upheld unless the decline is both significant in magnitude (typically 15–20% or more of revenue or EBITDA) and durationally significant (not a short-term disruption). The Akorn v. Fresenius case in 2018 was one of the first Delaware decisions to uphold a MAC invocation, and the facts involved a 30%+ decline in EBITDA.
A founder who runs a $15M revenue services business and signs a purchase agreement in October should understand that if a major customer representing $3M of revenue cancels in November, that is a 20% revenue decline, squarely within the range courts have considered a MAC.
The closing condition would likely allow the buyer to refuse to close.
AI diligence angle
Run a short scan to identify reporting, data room, and workflow gaps that could affect diligence confidence.
Run an AI readiness scan →Regulatory conditions: HSR and other approvals
Deals above the HSR Act threshold require pre-merger notification to the Department of Justice and Federal Trade Commission before closing. The threshold adjusts annually; for 2024, the base threshold is $119.5M in deal value. Deals above the threshold require a mandatory 30-day waiting period, extendable if the agencies issue a Second Request for additional information.
For most lower middle market transactions ($5M–$100M), HSR filing is not required, and regulatory conditions are limited to industry-specific approvals: state insurance commissioner approval for insurance businesses, FCC approval for telecommunications, FDIC or OCC approval for banking. The list of required approvals should be identified early and included in the closing condition schedule.
File HSR Notification
Both buyer and seller file within 10 days of signing
Initial 30-Day Review
Agencies review filing, may issue Second Request
Second Request Response
If issued, typically adds 60–120 days to timeline
Clearance or Expiration
Agencies clear or waiting period expires; closing can proceed
HSR Second Requests are uncommon in middle market deals but can delay closing by 90–180 days, identify antitrust risk before signing and negotiate an outside date that accommodates a potential Second Request.
What triggers an HSR filing: The HSR Act requires pre-merger notification when the transaction value exceeds the base threshold ($119.5M for 2024, adjusted annually) AND the acquiring person or the acquired person exceeds size-of-person thresholds. Both the transaction size test and the person size test must be met. For most lower middle market deals, the transaction value test alone screens out the filing requirement, but founders should confirm with counsel before assuming they are below the threshold. PE platform companies making an add-on acquisition can trip the person size test even on a relatively modest deal if the platform has substantial revenues.
What the HSR filing contains: The filing requires the acquirer and the target to each submit a Notification and Report Form with the DOJ and FTC. The form includes detailed financial information, descriptions of the business, and an analysis of competitive overlaps. The filing fee alone ranges from $30,000 (for deals between $119.5M and $238.1M) to $2.335 million (for the largest deals). Both parties must file simultaneously within 10 business days of signing.
HSR Filing Fee Schedule (2024)
Managing HSR timing in a deal structure: The 30-day initial review period begins when the agencies receive a complete filing. An incomplete filing is rejected and the clock restarts. Sellers who are close to the HSR threshold should confirm the filing requirement with antitrust counsel before signing, because the outside date in the purchase agreement needs to accommodate the potential HSR timeline. A deal signed with a 60-day outside date that requires HSR review will almost certainly miss the outside date unless extensions are negotiated.
Bring-down of representations at closing
The bring-down condition requires that all of the seller's representations and warranties remain true as of the closing date, not just as of the signing date. This is one of the most significant closing conditions in any purchase agreement because the business continues to operate between signing and closing, and events can occur that make previously accurate reps inaccurate.
Bring-down conditions are typically qualified by a materiality standard: representations that were individually qualified by materiality must remain true in all material respects, and unqualified representations must remain true in all material respects as of closing. The practical result is a two-tiered bring-down: some reps bring down on their own terms, and others bring down subject to a material adverse effect standard.
The seller's obligation to notify the buyer of any event between signing and closing that would make a rep inaccurate is typically covered by a separate update or supplementation obligation. Sellers should understand whether the purchase agreement allows supplementing the disclosure schedules to update reps for post-signing events.
A seller who discovers between signing and closing that a key employee has resigned, that a customer has provided notice of non-renewal, or that a pending lawsuit has escalated materially must assess whether those events breach the bring-down condition, and notify counsel immediately.
Financing conditions and reverse termination fees
Private equity buyers frequently include financing conditions in their purchase agreements, conditioning their obligation to close on the availability of their debt financing. Strategic buyers and family offices typically do not include financing conditions. Financing conditions create meaningful deal risk for sellers: if the credit markets deteriorate between signing and closing, the buyer may be unable to close even with good intentions.
The primary seller protection against financing condition risk is the reverse termination fee (RTF). An RTF is a contractually specified amount the buyer must pay the seller if the buyer fails to close due to a financing failure or other buyer-side default. RTFs in private M&A typically range from 3–6% of deal value. At a $25M transaction, a 5% RTF means the buyer owes $1.25M if it fails to close.
3–6%
Typical RTF as % of deal
$119.5M
HSR threshold (2024)
30 days
HSR waiting period
Sellers should push for RTFs whenever a financing condition is included, and should negotiate the RTF as the buyer's sole remedy for deal failure on the buyer side. Some buyers will agree to specific performance (a court order requiring them to close) as an alternative to an RTF, which is generally stronger seller protection but harder to enforce.
In competitive sale processes, sellers represented by experienced advisors routinely eliminate financing conditions or negotiate RTFs that represent 5% or more of deal value, sellers who accept financing conditions without RTFs leave significant downside exposure unprotected.
Escrow mechanics and closing condition risk allocation
Even after closing conditions are satisfied and the deal closes, a portion of the purchase price is typically held in escrow for 12–18 months to secure the seller's indemnification obligations. The escrow is separate from closing conditions but interacts with them: the size of the escrow is often influenced by known risks that were identified during diligence and that buyers wanted to address through the closing condition structure.
Known liabilities that are specifically identified during diligence may be addressed through a combination of escrow, purchase price adjustment, or a specific indemnity. For example, a $500K pending litigation matter might be handled by excluding it from the MAC condition (so it does not trigger a failure to close) but including a specific indemnity with dollar-for-dollar coverage up to $500K from the escrow.
Scroll to see more →
Rep and warranty insurance (RWI) has become standard in transactions above $20M. RWI allows sellers to reduce or eliminate the general escrow by shifting indemnification risk to an insurance carrier. The premium is typically 2.5–4% of the policy limit, and the policy limit is usually 10–20% of deal value. At a $30M deal with a $3M policy, the premium might be $90K–$120K.
Practical steps for sellers to minimize closing condition risk
The best time to negotiate closing conditions is before signing, not after. Sellers who engage experienced transaction counsel and advisors before signing are better positioned to limit MAC definitions, eliminate financing conditions, and negotiate RTFs. Post-signing negotiation of closing conditions is difficult because the leverage dynamics have shifted.
Identify Required Consents Early
Map all material contracts, leases, and licenses that require consent to assignment
Conduct Pre-Signing Diligence on Regulatory Requirements
Confirm whether HSR or industry approvals apply before setting an outside date
Limit the MAC Definition
Negotiate specific exclusions for industry conditions, customer concentration risks, and pending matters disclosed in schedules
Push for Reverse Termination Fees
Require 3–5% RTF whenever a financing condition is included
Set a Realistic Outside Date
Include automatic extensions for regulatory delays; outside dates of 6–9 months are reasonable for deals with HSR exposure
Monitor Bring-Down Obligations
Have counsel track material business events between signing and closing that could affect rep accuracy
Founders often underestimate the importance of the period between signing and closing. The business must be operated in the ordinary course, material contracts cannot be entered into or terminated without buyer consent, and any material adverse development must be disclosed. The 60–120 days between signing and closing is a period of significant constraint on the seller's ability to operate the business freely.
Sellers who retain M&A counsel and transaction advisors before signing, not after, are statistically more likely to close on time, at the negotiated price, and with fewer post-closing disputes.
Frequently asked questions about closing conditions
Frequently asked questions
Does an HSR filing become public?
HSR filings are confidential. The DOJ and FTC cannot disclose the contents of an HSR filing, and there is no public registry of pending filings. However, news of a large transaction often becomes public through other channels (press releases, employee communications, regulatory approvals in other jurisdictions). The HSR filing itself does not create a disclosure obligation.
What is an HSR Second Request and how likely is it?
A Second Request is a formal demand from the agencies for additional information and documents beyond the initial filing. It is relatively rare in lower middle market transactions, particularly those without significant competitive overlap. In deals above $500M with industry overlap, Second Request risk should be priced into the transaction timeline. Second Requests typically add 3–6 months to the closing timeline and cost $500K–$2M+ in compliance costs for each side.
Can parties close before HSR clearance?
No. Closing before the HSR waiting period expires is a per se violation of the HSR Act and subjects both parties to significant civil penalties. The penalty is up to $51,744 per day per violation. Parties must wait for the waiting period to expire or be terminated early by the agencies before closing.
What happens if a closing condition is not satisfied by the outside date?
If a required closing condition is not satisfied, either party may have the right to terminate the transaction without closing. The purchase agreement defines the termination rights: typically, either party can walk if the outside date passes without a condition being met, unless the failure to satisfy the condition is caused by the terminating party's own breach. Some conditions can be waived by the party they benefit, which allows closing to proceed despite the unsatisfied condition. Outside dates are frequently extended by mutual agreement when a condition is close to being satisfied.
Can a buyer waive a financing condition mid-diligence?
Yes, and it happens regularly. If a buyer has arranged financing before its condition triggers a delay, waiving the financing condition removes a significant source of closing risk for the seller. Sellers should request that buyers waive their financing conditions as early as possible once financing is secured. A buyer who has closed its financing and refuses to waive the condition is using it as optionality, which should be flagged in negotiations.
What is the practical difference between a MAC clause and a specific closing condition?
A MAC (Material Adverse Change) clause is a broadly defined condition that allows a buyer to terminate if the target business suffers a material deterioration between signing and closing. Specific conditions are defined, binary tests: consents received, no injunctions, representations true. MAC clauses are intentionally vague, which makes them difficult to invoke and rarely exercised successfully. Courts have found MAC conditions satisfied in fewer than a handful of publicly-litigated cases. Specific conditions are more reliable as closing mechanism controls for both sides.
Work with Glacier Lake Partners
Prepare for Diligence
Glacier Lake Partners helps founders understand and negotiate closing conditions before entering a sale process.
Assess Your Readiness →AI diligence angle
See where AI can clean up readiness before buyers ask.
Run a short scan to identify reporting, data room, and workflow gaps that could affect diligence confidence.
Run an AI readiness scan →Research sources
Disclaimer: Financial figures and case-study details in this article are anonymized, composite, or representative examples based on middle market operating situations, and are not guarantees of outcome. Statistical references are drawn from cited third-party research; individual transaction and operational results vary based on business characteristics, market conditions, and deal structure. This content is for informational purposes only and does not constitute legal, financial, or investment advice. Consult qualified advisors for guidance specific to your situation.
Explore adjacent topics
