Helping Entrepreneurs Make Sense of M&A Deal Terms


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negotiating out the adjustment mechanism and instead adding to the reps and warranties. Representations are statements of fact by the seller regarding the condition of its business, covering virtually all aspects of the company. Warranties are the seller’s assurances to the buyer that the representations are true, and that if they are not, the buyer will be entitled to seek legal remedies.

Study results:

  • Two-thirds of deals have post-closing purchase price adjustments


Earnouts are commonly associated with life sciences deals where obvious milestones like FDA approvals are in play, but data shows that they actually come up frequently across all deal types. Be prepared to negotiate milestones and make sure they are clear and measurable, or you will run into problems in the post-closing period.

Study results:

  • 25 percent of deals have earnouts
  • One-third of earnouts have periods in excess of 5 years
  • 59 percent of deals allow the buyer to offset indemnity payments against earnouts

And those esoteric terms at the beginning of this article? These should be evaluated on a case-by-case basis, but here’s what they mean:


The basket is the threshold claim amount that must be reached before the seller becomes liable for the buyer’s losses. Typically, baskets function in one of two ways. Under a “deductible” basket, the seller is only liable for damages in excess of the threshold amount. If the agreement includes a “first dollar” basket, the seller is liable for all damages once the threshold amount has been reached.

Carve-outs to the cap

The cap is the maximum recovery a buyer may obtain for indemnification claims. Many agreements include separate caps for different types of breaches. Carve-outs are exceptions where the cap does not apply.


The time period after closing in which the buyer may make a claim against the seller or selling shareholders for breach of their representations, warranties and covenants. The time period is usually shorter than the applicable statute of limitations.

The bottom line is that entrepreneurs and investors who sell privately held companies face complex negotiations with outcomes that can have dramatic effects on net purchase consideration. While the specific deal terms may seem like a lot to digest, it’s well worth an entrepreneur’s time to learn a little about the ins and outs of the M&A process, as it can save enormous amounts of heartache and expense later.

To download a copy of the 2010 SRS M&A Deal Terms Study, go to

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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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