September 25, 2023
Survey: Middle Market Deal Terms
Seyfarth Shaw recently published the ninth edition of its “Middle Market M&A SurveyBook,” which analyzes key contractual terms for 105 middle-market private target deals signed in 2022 and the first half of 2023. The survey focuses on deals with a purchase price of less than $1 billion. Here are excerpts with some highlights:
– Over the last five years, our surveys have identified trends pointing to fewer deals involving an indemnity escrow and more deals involving no survival of the general representations and warranties. These trends appear to be particularly the case in deals utilizing R&W insurance. However, for deals in 2022/2023 not utilizing R&W insurance, there was an uptick in indemnity escrow usage and a decrease in “no survival” deals.
– The median indemnity escrow amount in 2022/2023 for the insured deals surveyed was approximately 1% of the purchase price (as compared to approximately 0.5% in 2020/2021). It is plain to see the dramatic impact that R&W insurance has on the indemnity escrow amount (approximately 1% for insured deals, as compared to approximately 8% for noninsured deals).
– The vast majority (approximately 85%) of insured deals had an indemnity escrow amount of less than 5%, and of those deals, approximately 82% had an indemnity escrow amount of 1% or less (as compared to 89% in 2020/2021). This is consistent with the prevailing R&W insurance structure of including a retention (deductible) equal to approximately 1% of deal value.
– As compared to prior years, the frequency of carve outs in insured deals increased in 2022/2023. This may reflect a greater leniency by R&W insurance carriers to treat more representations and warranties as “fundamental,” prompting buyers to seek increased use of carve outs in their purchase agreements thereby taking advantage of R&W insurance policy expansion of fundamental representations.
– In insured deals, the R&W insurance policy generally provides 6 years of coverage for fundamental representations and warranties (as opposed to 3 years for general representations and warranties).
Check out the full survey for more info on indemnity-related provisions, rep & warranty survival provisions & carve-outs, fraud exceptions & definitions, and governing law provisions.
– Meredith Ervine