Absence of material adverse change: Overview, definition, and example
What is absence of material adverse change?
Absence of material adverse change is a promise that things haven’t gone significantly wrong in a business since a certain point in time—usually between when a contract is signed and when it’s completed (or “closed”). It means that nothing big has happened that would seriously hurt the value, operations, or financial health of the business.
This phrase often appears in mergers, acquisitions, or investment deals as a kind of checkpoint: the buyer wants reassurance that the business they agreed to buy is still in basically the same shape.
Why is absence of material adverse change important?
Deals don’t always happen overnight. Between signing and closing, a lot can change—new lawsuits, major customer losses, big dips in revenue. An absence of material adverse change clause protects the buyer by giving them the right to walk away or renegotiate if something serious happens before the deal is finalized.
For sellers, it’s a signal to keep everything steady and avoid surprises. It also means they may need to disclose anything that could count as a “material adverse change”—so everyone stays on the same page.
Understanding absence of material adverse change through an example
Let’s say you’re buying a local coffee chain. You sign the contract in March, and the closing date is set for May. The agreement includes a clause requiring the business to continue operating in the “ordinary course” and confirms there’s been no material adverse change.
In April, one of the coffee chain’s largest locations is destroyed in a fire, causing major losses. Because that’s a serious, negative event that changes the value of the business, the buyer may be able to walk away from the deal—or push to renegotiate the price—based on the absence of material adverse change clause.
An example of an absence of material adverse change clause
Here’s how this kind of clause might appear in a contract:
“Since the date of this Agreement, there has been no Material Adverse Change in the business, financial condition, results of operations, or prospects of the Company. The Seller covenants that, between the date hereof and the Closing Date, it shall operate in the ordinary course of business and shall promptly notify the Buyer of any event that may constitute a Material Adverse Change.”
Conclusion
An absence of material adverse change clause gives buyers confidence that the business they’re buying won’t fall apart before the deal closes. It helps protect against big surprises that could affect the value of the transaction.
If you’re on the selling side, it’s a reminder to keep things stable—and to be transparent if anything major changes. For buyers, it’s a crucial line of defense that keeps the deal fair all the way through to closing. In any high-stakes transaction, this clause can make the difference between a smart investment and a risky one.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.