Leading law firm Seyfarth Shaw LLP has published the fourth edition of its Middle-Market M&A SurveyBook of Key M&A Deal Terms (the “Survey”). The Survey analyzes over 150 middle-market (<$1 billion) publicly available private target acquisition agreements signed in 2016.
The Survey focuses on the key deal terms comprising the “indemnity package” often included in private target acquisition agreements to address the issue of a seller’s potential post-closing liability to a buyer and defining the scope by which the purchase price paid to a seller may be clawed back by a buyer.
The data analyzed in the Survey suggests that while the current M&A environment is still trending to be more favorable to sellers as has been the case over the past two years, there are indications to suggest that certain terms are slightly less seller favorable than in 2015. As evidence, the Survey data revealed an increase in the median escrow period, an increase in the number of deals with an indemnity escrow amount of 10% or more, an increase in the median escrow amount, and an increase in the use of tipping baskets as opposed to a true deductible.
The competition among buyers searching to acquire quality assets continues to be fierce and the purchase of representation and warranty insurance continues to be a powerful tool used by buyers in an effort to make their acquisition proposal more attractive to a seller by significantly limiting potential post-closing liability of the seller.
While the Survey summarizes a variety of deal terms and trends in middle-market M&A transactions, below are several key takeaways:
- Indemnity Escrow Amounts Increase – The median indemnity escrow amount in 2016 was 8% of the purchase price compared to 6% in 2015 and 7.41% in 2014. Approximately 35% of deals surveyed had an indemnity escrow amount of 10% or more, compared to 24% in 2015, but still below 41% in 2014 and 52% in 2013.
- Escrow Periods Increase – The median indemnity escrow period increased in 2016 to 18 months, compared to 16.5 months in 2015 and 15 months in 2014 and 2013. The percentage of deals with an indemnity escrow period of 24 months or greater increased to approximately 16% in 2016 compared to 13% in 2015 and 11% in 2014.
- Increased Use of Tipping Baskets – The use of threshold/tipping baskets increased to approximately 28% in 2016 from 25% in 2015 and 17% in 2014.
- Median Indemnity Cap Has Remained Unchanged Since 2013 – The median indemnity cap remained steady in 2016 at 10% as compared to prior years.
- Decrease in Survival Period Carve Outs Related to Employee Benefits and Environmental Representations – The percentage of deals surveyed that carved out representations and warranties regarding employee benefits was approximately 23% in 2016 compared to 28% in 2015. Similarly, the percentage of deals that carved out representations and warranties regarding environmental matters was approximately 19% in 2016, which has been on a steady decline since 2013 when it was 30%.