By Carlos Medina
Shareholder / Florida Responsible Attorney
Carrasquillo Law Group

An acquisition opportunity, a prospective investor or access to additional financing can represent an important step in a company’s growth. Management may have identified the commercial benefits, evaluated the preliminary economics and determined that the transaction supports its broader objectives.

But an opportunity that makes sense commercially is not necessarily one the business is prepared to execute on the terms initially contemplated.

Existing financing arrangements may restrict what the company can undertake. Ownership or governance provisions may affect required approvals. The anticipated benefits of an acquisition may depend on financial assumptions that warrant closer examination.

These considerations can influence more than the timing of a transaction. They may affect its valuation, financing structure, allocation of risk and ultimately whether the proposed terms make sense for the business.

For CEOs, CFOs and business owners preparing for a significant transaction, three questions deserve attention before negotiations advance.

Is the Company Positioned to Execute the Transaction?

Consider a company preparing to raise additional equity to finance an expansion.

Management has identified a prospective investor, discussed valuation and reached a preliminary understanding of the investment amount. However, the company’s existing credit facility restricts certain ownership changes, while its governing documents provide existing investors with approval or participation rights.

These provisions do not necessarily prevent the investment from moving forward. They may, however, influence its structure, the approvals required and the conditions that must be satisfied before closing.

Similar considerations arise in acquisitions and financing transactions. Restrictions on additional indebtedness, existing guarantees or third-party consent requirements may affect what the company can undertake and on what terms.

The practical question is not simply whether management wants to proceed or whether the company has authority to do so. It is whether the company’s existing commitments allow the proposed transaction to be executed as contemplated, or whether those commitments require a different approach.

For management, identifying these matters before substantive negotiations advance can help distinguish routine documentation requirements from restrictions that may affect the transaction’s economics, structure or feasibility.

 Does the Transaction Make Financial Sense Beyond Closing?

A transaction may be financially feasible at closing without necessarily supporting the company’s financial position afterward.

Consider a business pursuing an acquisition that would expand its operations into a new market.

Management has negotiated an acceptable purchase price and identified financing sufficient to complete the acquisition. Projected revenues and anticipated operating efficiencies appear to support the investment.

But the purchase price is only one component of the financial commitment.

The acquiring company may also require additional working capital, integration expenditures, investments in personnel or systems, and sufficient liquidity to service the debt incurred to finance the transaction.

If those requirements are underestimated, the acquisition could place greater pressure on cash flow than anticipated.

The consequences may extend beyond reduced profitability or tighter liquidity.

Suppose the acquisition is financed through a credit facility that requires the borrower to maintain specified financial ratios. If operating performance falls short of projections, the company may face difficulty satisfying those financial covenants.

Depending on the financing agreement, a covenant breach may constitute an event of default, subject to any applicable notice, cure or other contractual provisions.

Even absent a default, the company may face limitations on additional borrowing, distributions or other actions that could otherwise help it respond to changing circumstances.

What began as an operating or financial challenge can therefore become a contractual issue affecting the company’s available options.

This relationship between financial performance and legal obligations is particularly important when evaluating the terms of a financing arrangement.

Covenant thresholds, financial definitions, permitted exceptions, cure provisions and other negotiated protections can influence how much flexibility a borrower retains if circumstances change.

For a CFO, the relevant analysis extends beyond determining whether financing is available. It includes understanding how the resulting obligations interact with anticipated cash flow, existing commitments and the company’s capacity to absorb less favorable operating results.

Similar tradeoffs arise in equity investments. A company may obtain needed capital without incurring additional debt, but preferred returns, investor consent rights or distribution priorities can affect future financial and operational flexibility.

These obligations may be commercially reasonable. The important consideration is whether their consequences are understood and appropriately reflected in the transaction.

The question is not simply whether a transaction can be financed, but whether the business can support the obligations it creates under a reasonable range of operating conditions.

What Could Change the Terms of the Deal?

Preparing for a transaction also involves understanding which risks could affect its economics and how those risks might be addressed through negotiation.

Consider a company evaluating the acquisition of an operating business.

The parties have discussed a purchase price based on historical earnings and anticipated growth. During due diligence, however, the buyer discovers that a substantial portion of the target company’s revenue depends on a small number of customers, including one whose principal contract is approaching expiration.

The concern is not simply whether the customer relationship will continue. It is how that uncertainty affects the value of the business and the financial exposure the buyer is prepared to assume.

The buyer may conclude that the acquisition remains attractive, but that paying the entire proposed purchase price at closing would place too much weight on future revenues that are not assured.

The seller, on the other hand, may believe the customer relationship is stable and that the agreed valuation remains appropriate.

Rather than abandoning the transaction, the parties might consider adjusting the purchase price or making a portion of the consideration contingent on the renewal or continued performance of the material customer relationship, or on other agreed measures of future performance.

But that solution introduces additional questions.

How will performance be measured? What discretion will the buyer retain after closing? Could the buyer’s operational decisions affect the seller’s right to receive additional payment?

The parties may also need to consider whether particular actions or omissions could affect the conditions triggering payment.

A contractual solution can therefore introduce its own set of rights, obligations and potential disputes.

Alternatively, the parties may negotiate a different purchase price, specific representations concerning material customer relationships, indemnification provisions or other protections appropriate to the identified risk.

The choice among these approaches depends on the nature of the uncertainty, the parties’ negotiating positions and the economics of the transaction.

 Identifying a risk does not necessarily mean a transaction should be abandoned. Addressing that risk contractually, however, does not necessarily eliminate its economic consequences.

An indemnification provision, for example, may provide a remedy for specified losses, but its practical value depends on its limitations, available security and the financial capacity of the party responsible for payment.

A purchase price adjustment may address changes in working capital or indebtedness, but only if the relevant amounts and calculation procedures are appropriately defined.

These mechanisms serve different purposes. Their effectiveness depends on whether they address the particular exposure the parties intend to allocate.

The same principle applies to financing transactions. A lender may require collateral, guarantees or financial covenants to manage its exposure, while a borrower may negotiate limitations, exceptions or other provisions that preserve operating flexibility.

In each case, legal terms influence the financial consequences of an uncertain outcome.

A well-structured transaction is not one in which every risk has been eliminated. It is one in which material risks have been identified, evaluated and appropriately addressed in the transaction’s terms.

For business leaders, the important distinction is between risks that are inherent in the opportunity, risks that can be reasonably mitigated and risks whose consequences should be allocated or reflected in the negotiated economics.

Understanding that distinction can be more valuable than approaching individual contractual provisions as isolated negotiating points.

 Frequently Asked Questions

 What should a business review before entering a significant transaction?

Management should evaluate existing financing obligations, ownership and governance arrangements, required approvals, financial capacity and the risks associated with the proposed transaction. These considerations can influence the transaction’s structure, timing, valuation and feasibility.

Can an existing financing agreement affect a company’s ability to complete an acquisition or obtain new capital?

Yes. Depending on its terms, an existing financing agreement may restrict additional borrowing, ownership changes, distributions or certain transactions. These provisions may require lender consent or influence how the proposed transaction is structured.

 What happens if a company violates a financial covenant after an acquisition?

Depending on the financing agreement, a covenant breach may constitute an event of default, subject to applicable notice, cure or other contractual provisions. The consequences may include contractual remedies or limitations on the company’s financial and operational flexibility.

Can a transaction be financially viable at closing but create financial difficulties afterward?

Yes. Additional working capital requirements, integration costs, debt service obligations and operating results below projections may place pressure on liquidity and affect the company’s ability to satisfy its contractual commitments.

 Does identifying a material risk during due diligence mean a transaction should be abandoned?

Not necessarily. Depending on the circumstances, the parties may address the risk through valuation adjustments, contingent payment arrangements, representations, indemnification provisions or other negotiated protections.

 Do contractual protections eliminate the financial risks associated with a transaction?

Not necessarily. Contractual protections may help allocate or mitigate particular risks, but their effectiveness depends on their specific terms, limitations, available security and the financial capacity of the parties responsible for fulfilling their obligations.

 Preparing for the Decision, Not Just the Transaction

Transaction readiness does not require completing an extensive due diligence exercise before beginning discussions with a prospective buyer, lender or investor. Nor does it mean attempting to eliminate every uncertainty associated with a potential transaction.

The objective is more practical: understanding the company’s existing commitments, evaluating its financial capacity and identifying circumstances that could materially influence the terms or execution of the proposed transaction.

That understanding helps management distinguish between risks it is prepared to accept, exposures that warrant additional protection and issues that may justify reconsidering the transaction’s economics or structure.

For businesses contemplating acquisitions, investments or financing opportunities, these considerations can form part of the broader strategic and financial planning process.

Ultimately, the value of transaction preparation lies in understanding not only whether a proposed deal can be completed, but also how its financial obligations, contractual protections and allocation of risks will affect the business after closing.

Legal structuring plays an important role in translating those considerations into the terms of the transaction, allowing management to evaluate the opportunity with a clearer understanding of both its potential benefits and its consequences.

At Carrasquillo Law Group, our Business & Corporate practice advises businesses, owners and investors on corporate transactions, financing, private capital and related governance matters.

 Learn more about Carrasquillo Law Group’s Business & Corporate practice.

 This article is provided for general informational purposes only and does not constitute legal advice. The legal needs of each business depend on its particular facts and circumstances.