May 17, 2021

Study: Private Target Deal Terms

SRS Acquiom recently released its annual M&A Deal Terms Study, which reviews the financial & other terms of 1,400 private target deals that closed during the period from 2015 through 2020. Here are some of the key findings about trends in last year’s deal terms:

– There was a significant increase in the percentage of deals with buyer equity as a component of deal consideration. 21% of 2020 deals featured buyer equity as part of deal consideration, up from 13% in 2018 and 15% in 2019.

– The percentage of deals with a management carveout remained relatively low in 2020, at 6.7%; although the study noted an increase in deals with 1-3x returns that did have a carveout.

– The rise of separate purchase price adjustment (PPA) escrows continued, with 68% of deals having this feature in 2020, up from 59% in 2019. The median size of those escrows was 0.7% of transaction value.

– Earnouts saw significant developments that that SRS Acquiom believes were influenced by the pandemic. The percentage of deals with an earnout increased from 15% in 2019 to 19% in 2020, and the median earnout potential as a percentage of the closing payment increased significantly, to 39%, possibly because parties were relying more on earnouts to bridge valuation gaps that arose from pandemic uncertainties.

– The pandemic also influenced the way earnouts are structured. Earnout periods for 2020 deals trended longer, with fewer deals having an earnout period that is one year or less, and more that are set to last two or three years. More deals used an “Earnings/EBITDA” test, while “Revenue” tests became less predominant.

– A new carveout to the definition of Material Adverse Effect became common almost overnight. While included infrequently prior to 2020, a “Pandemic” was added as an exception to the definition of a Material Adverse Effect in more than three quarters of deals by the third quarter of 2020. This was frequently accompanied by an exception for a disproportionate impact of the pandemic on the seller company.

– “10b-5“ and “full disclosure“ type representations are continuing to become less popular; 84% of deals did not contain either provision. More deals contained both a “no other representations“ and “non-reliance“ provision. These provisions are influenced by RWI and in many cases include a fraud carveout.

As always, the study contains plenty of interesting information about closing conditions, indemnification terms, dispute resolution and termination fees.

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John Jenkins