When the Lender Got Cold Feet Three Weeks Before Closing

The situation

Natalia, a real estate agent, and Hodan, an elementary school teacher, had spent three years building a personal investment partnership together, buying rental properties and, more recently, looking for a larger business to acquire. Through a mid-market private equity fund they had co-invested with before, they found a target in Vaughan: a commercial services company generating steady contract revenue, being sold by its founder, Oksana, who was ready to retire. The purchase price was agreed at roughly $22,000,000, structured as a straightforward asset purchase through a newly formed acquisition company. Natalia and Hodan would hold a minority equity stake personally, with the private equity fund holding the majority, and the balance funded through a senior debt facility from a commercial lender the fund had worked with on other deals.

Our team was retained to act for the buying group once the purchase agreement was in advanced drafting, working alongside the fund's in-house counsel to negotiate representations, warranties, and closing conditions, and to coordinate the debt financing documentation with the lender's counsel. The purchase agreement was signed with a closing date roughly eight weeks out, financing conditions included, which is standard practice — a signed agreement conditional on financing is common, but it also means the deal is not guaranteed until that condition is satisfied or waived.

The lender gets cold feet

The purchase agreement contemplated a senior debt facility of about $8,000,000, with the private equity fund and the two individual investors together funding the remaining roughly $14,000,000 in equity. The lender had given a term sheet early on, but the term sheet was itself conditional on final credit committee approval — a distinction that matters. A term sheet signals interest and sets out proposed pricing and terms; it is not a binding commitment to lend, and lenders routinely reserve the right to adjust or withdraw after their own underwriting is complete.

Three weeks before closing, the fund's deal lead called with the news. The lender's credit committee had flagged that a meaningful share of the target's revenue came from a small number of long-standing service contracts, several of which were up for renewal within the next two years. That concentration risk, combined with a general tightening in the lender's underwriting posture that quarter, led the committee to approve a facility of only about $5,000,000 — roughly $3,000,000 less than what the deal's financing structure had assumed.

That left the buying group short by about $3,000,000, with a closing date fixed by contract and a seller who had already made retirement plans around it. The purchase agreement's financing condition gave the buyers a route to walk away without penalty, but nobody on the buying side wanted that outcome — the deal remained a good one on its merits, and Oksana had been a reasonable and transparent seller throughout diligence. The task was to close the gap, not the deal.

What we did

1. Confirmed the financing condition and the real deadline. Before proposing anything, we reviewed exactly what the purchase agreement required for the financing condition to be satisfied and by when, and confirmed with the fund's counsel how much flexibility existed on the closing date itself without triggering a default under the agreement.
2. Modelled the shortfall against every available source. We worked through the buying group's options: a larger equity contribution from the private equity fund, additional personal capital from Natalia and Hodan, a smaller acquisition footprint that carved out a non-core part of the target's business, or seller financing. Pure equity top-up from the fund alone would have diluted the individual investors' agreed stake beyond what they were comfortable with, and a smaller acquisition risked reopening the whole valuation.
3. Approached Oksana's lawyer about a vendor take-back note. A vendor take-back is a loan from the seller to the buyer, secured against the assets being sold, repaid over an agreed term after closing instead of paid in full on closing day. Sellers are often willing to consider one when the alternative is a delayed or collapsed sale, particularly a seller who is retiring and wants certainty of exit more than an all-cash close on a specific day. Oksana's lawyer was receptive, and we negotiated a note of about $2,000,000, secured and subordinate to the reduced senior lender's facility, repayable over a fixed term at a market interest rate.
4. Arranged the remaining top-up as additional personal equity. That still left roughly $1,000,000 to find. Natalia and Hodan agreed, after discussion with the fund, to increase their personal equity contribution by that amount, in exchange for a modestly larger share of the minority stake — a term we negotiated into the amended equity arrangements among the investors so their increased contribution was properly reflected in their ownership percentage.
5. Revised the closing documents to reflect the new capital stack. With the $5,000,000 senior facility, the $2,000,000 vendor take-back note, and the increased equity contributions now totalling the full $22,000,000 purchase price, we updated the purchase agreement's financing schedule, the intercreditor arrangements between the lender and Oksana as note holder, and the closing agenda, all within the two weeks remaining before the original closing date.
6. Kept the closing date intact. Because the shortfall was resolved through restructuring rather than delay, we did not need to seek an extension from Oksana or amend the closing date in the purchase agreement, which avoided reopening any other negotiated terms.

The outcome

The acquisition closed on the original date, funded by the reduced $5,000,000 senior facility, the $2,000,000 vendor take-back note from Oksana, and roughly $15,000,000 in combined equity from the private equity fund and the two individual investors, including Natalia and Hodan's increased contribution. The target company transferred to the new ownership group without disruption to its ongoing contracts or staff, and the transition to Oksana's retirement proceeded on schedule.

The vendor take-back note gave Oksana a modest ongoing return on part of the sale price rather than a lump sum, which she accepted in exchange for certainty that the deal would close as planned. For the buying group, the note came with a real cost — interest payments and a subordinated lender relationship with the very person who had just sold them the business — but it was a manageable cost against the alternative of losing the deal or renegotiating the price downward at the last minute. Natalia and Hodan's larger personal stake also meant more of their own capital at risk in a business they otherwise held only a minority position in, a trade-off they weighed carefully before agreeing.

The whole restructuring, from the lender's revised approval to signed closing documents, was compressed into roughly two weeks, which is fast for a financing change of this size and reflects how much groundwork the buying group and Oksana's side had already done during the original diligence period. A shortfall discovered with only days left, rather than weeks, would likely have forced a choice between a delayed closing and a collapsed one.

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