What Are Closing Conditions? | Agency M&A Definition
Closing conditions are the specific requirements that must be satisfied before a business sale can be finalized. These are the contractual hurdles both buyer and seller must clear between signing the purchase agreement and actually transferring ownership and funds. If a closing condition is not met, the other party typically has the right to walk away from the deal without penalty.
Closing Conditions in Agency M&A
In marketing agency transactions, closing conditions address the unique risks of buying a people-and-relationships business. A common condition requires that key employees — say, the head of client services and the lead strategist — sign employment agreements with the buyer before closing. Without this, the buyer risks paying millions for an agency whose core talent walks out the door on day one. Another standard condition is that no material client has given notice of termination between signing and closing. If your agency has a $400,000-per-year anchor client and they cancel during the 30-60 day gap between signing and closing, the buyer will invoke this condition to renegotiate or exit the deal. Landlord consent is another frequent condition, particularly for agencies with favorable lease terms in desirable locations. Regulatory approvals are rarely an issue for agency deals unless the transaction crosses international borders or involves government contracts. The period between signing and closing — typically 30-90 days for agency deals — is when both sides race to satisfy these conditions while maintaining business-as-usual operations.
How Closing Conditions Affect Agency Valuation
Closing conditions influence deal certainty, which in turn affects how sellers and their advisors evaluate competing offers. An offer at 6x EBITDA with minimal closing conditions may be more valuable than a 7x offer loaded with conditions that could collapse the deal. Each unfulfilled condition represents a potential off-ramp for the buyer. Sophisticated agency sellers negotiate to limit closing conditions to only those that are truly material and within their control. They also push for “hell or high water” provisions on buyer-side conditions, requiring the buyer to take all reasonable steps to satisfy regulatory or financing requirements. A deal with five closing conditions has roughly a 15-20% higher failure rate than one with two conditions, based on middle-market transaction data. Sellers should also negotiate a “drop-dead date” — a deadline by which all conditions must be met or the deal terminates — to prevent indefinite limbo.
Example
A performance marketing agency agrees to sell for $4.2 million. The purchase agreement includes four closing conditions: (1) the three senior media buyers must sign two-year employment agreements with the buyer, (2) clients representing at least 80% of trailing-twelve-month revenue must still be under active contract at closing, (3) the agency’s office lease must be assignable or a new lease negotiated, and (4) the buyer must secure financing. During the 45-day closing period, one media buyer declines to sign. The buyer invokes the condition and renegotiates the price down by $200,000 to account for the retention risk. The remaining conditions are met, and the deal closes at $4 million with a revised earnout to bridge the gap.
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