Mid-Market M&As: Still a Seller’s Market

Mid-Market M&As: Still a Seller’s Market

It’s still a sellers market when it comes to private company sales, but in the past two years there are some agreement terms that are less favorable, according to a new report.

Seyfarth Shaw LLP, a  New York-based law firm, this week published its Middle-Market M&A SurveyBook of Key M&A Deal Terms analyzing more than 150 middle-market private company acquisition agreements signed in 2016.

While the current private company mergers and acquisitions environment is competitive among buyer and “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,” according to the findings.

Here are key takeaways from the survey:

•   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%.