While the current M&A environment is still trending to be more favourable to sellers as has been the case over the past two years, there are indications to suggest that certain terms are slightly less seller favourable than in 2015.
This is according to law firm Seyfarth Shaw’s fourth edition of its Middle-Market M&A SurveyBook of Key M&A Deal Terms, which analyses over 150 middle-market (<USD1 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.
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 per cent 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.
The median indemnity escrow amount in 2016 was 8 per cent of the purchase price compared to 6 per cent in 2015 and 7.41 per cent in 2014. Approximately 35 per cent of deals surveyed had an indemnity escrow amount of 10 per cent or more, compared to 24 per cent in 2015, but still below 41 per cent in 2014 and 52 per cent in 2013.
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 per cent in 2016 compared to 13 per cent in 2015 and 11 per cent in 2014.
The use of threshold/tipping baskets increased to approximately 28 per cent in 2016 from 25 per cent in 2015 and 17 per cent in 2014.
The median indemnity cap remained steady in 2016 at 10 per cent as compared to prior years.
The percentage of deals surveyed that carved out representations and warranties regarding employee benefits was approximately 23 per cent in 2016 compared to 28 per cent in 2015. Similarly, the percentage of deals that carved out representations and warranties regarding environmental matters was approximately 19 per cent in 2016, which has been on a steady decline since 2013 when it was 30 per cent.
