Helping Entrepreneurs Make Sense of M&A Deal Terms


Selling a company is hard. For starters, how do you know if you’re getting a good price, especially with a company that has little to no revenue? Is $10 million a good number? $50 million? $100 million? Nobody wants to be the sucker who sold a company for a fraction of what it was really worth, but everybody also knows the story of the entrepreneur who turned down the $400 million deal only to shut the doors 18 months later.

Once you get past price, deal terms just get more complicated, especially if you haven’t done a lot of work in this area. All of the sudden lawyers are talking to you about things like the size of the “basket,” “carve-outs to the cap,” “survival” and similar sorts of language that sounds wholly foreign at first. How is an entrepreneur supposed to know which of these issues to care about and whether the deal the company is getting makes sense and is a fair one in the marketplace?

To help entrepreneurs, investors, and lawyers get a better handle on deal terms, my company, Shareholder Representative Services recently completed an M&A Deal Terms Study, compiling information on deal terms from more than 80 private company acquisitions SRS has handled since 2007.

Here are some definitions and key findings from the study:

Escrow size/period

An escrow or holdback is the portion of the merger consideration that is deposited with a neutral third party (in the case of an escrow) or withheld by the buyer (in the case of a holdback) to be applied towards potential future indemnification claims by the buyer. Indemnification is where one party to an agreement (typically the seller) reimburses the other (typically the buyer) for any losses they incur as a result of the transaction. So the buyer will sometimes make claims against the escrow or holdback to recover such losses. After a specified period of time consideration remaining in the escrow or holdback account is released to the selling shareholders. The length and size of the escrow is very deal specific, so make sure whatever you agree to is fair as it relates to your business. Also, be sure to set aside an expense fund (in addition to the escrow) so shareholders can more easily fight claims.

Study results:

  • Two-thirds of deals have escrows in excess of 12 months
  • 59 percent of deals have escrows in excess of 10 percent of deal value

Post-closing purchase price adjustments

Purchase price adjustments, typically working capital adjustments, are common and even expected. We find that the majority of the deals with adjustment mechanisms result in actual adjustments, which sometimes entail substantial work and legal fees. You might be able to avoid this by … Next Page »

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Paul Koenig is co-founder and managing director of San Francisco-based Shareholder Representative Services, which serves as a professional shareholder representative following the acquisition of a VC-backed portfolio company. Follow @

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