Closing Conditions in a Purchase Agreement: What Has to Be True Before the Deal Closes

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.