Acquisition Finance Red Flags – Spotting Hidden Traps in Loan Agreements

Acquisition Finance Loan Agreements can be a bit of a sticky wicket. On the one hand, all the major terms have been agreed between the parties in the letter of intent. While these major terms are usually clear in the loan agreement, new language and rights often pop up for the first time, which makes it uncomfortable for the company. These new things are often traditional legalese, too minor for the acquisition finance lender to disclose up front in the term sheet.

However, beneath these sections in the subterranean regions of the agreement often lurk hidden traps which all borrowers need to delete. It is hard to understand how these traps emerge. The parties have usually had copious discussion about the loan agreement and the lender’s approach to managing risk throughout the process. Sometimes the loan document is just unexamined boilerplate to the acquisition finance lender, and they do not think through the impact of the language to the company.

More worrisome is when the language is very specific to the borrower, not general boilerplate, and has highly detailed reporting requirements. When you spot a passage in the loan document that has not been discussed before but contains highly customized language requesting granular data that you currently do not even measure – watch out! This type of language reveals a highly calculating and operating intensive view more akin to an equity investor than a lender. Lenders by nature are not operators and not equipped to oversee running a company, even if they think they are.

This language is often accompanied by more aggressive collateral security rights, resistance to qualifiers for reps and warranties and well as resistance to grace periods for events of default. When the requirements for each of these become very restrictive, the lender is overreaching and must be pushed back on. Many acquisition finance lenders feel justified to have restrictive documents due to the inherent risk of the loan. Nonetheless, common ground must be found for the Company to feel secure knowing the lender will not accelerate and foreclose at the first opportunity they get.