May 1, 2023

Study: Private Target Deal Terms

SRS Acquiom recently released its annual M&A Deal Terms Study, which reviews the financial & other terms of 2,100 private-target acquisitions valued at more than $460 billion that closed between the beginning of 2017 and the end of 2022. Here are some of the key findings about trends in last year’s deal terms:

– Transaction values were lower in 2022 relative to the record-breaking 2021 M&A market; lower-middle market targets may have been more attractive for buyers avoiding regulatory scrutiny, with limited financing options, or being mindful of uncertain economic conditions.

– The median return on investment for 2022 deals was 4x, down from 5.2x in 2021 but still higher than 2019 and 2020 levels at 3.4x and 3.5x, respectively. The average return on investment increased to 9.1x from 8.5x in the previous year, owing to the top 5% of M&A deals having high transaction values and ROI.

– Shifting trends in earnout structures resulted in a higher prevalence of earnouts (21% v. 17%) in 2022, increased use of earnings or EBITDA metrics, longer performance periods, and virtually no deals with a buyer covenant to run the business in a way that maximizes the earnout.

– PPAs are nearly universal in private M&A; 94% of 2022 deals included a PPA, predominately via a separate mechanism in the consideration section. More than one in four PPAs used a customized approach for accounting methodology, typically via a calculation worksheet attached as an exhibit.

– 93% of deals had at least one escrow; 52% of deals had at least two escrows (e.g., indemnification, PPA, or other special escrow). The median size of all escrows combined as a percentage of transaction value on deals with an indemnification escrow that do not use RWI was 11.3% and 2.5% for deals with RWI identified, compared to 10% and 0.5%, respectively, for the median size of only the indemnification escrow.

As always, the study contains plenty of interesting information about reps & warranties, covenants, indemnification terms, dispute resolution and termination fees.

John Jenkins