This month’s issue of the monthly executive brief providing M&A market insight for C-level management and their professional advisors.
Mergers and acquisitions are complex transactions involving intricate negotiations by both buyer and seller. Once a buyer in a transaction has been selected, both sides work with their respective investment bankers and lawyers to draft the purchase agreement and other definitive documents. One such document is the indemnification agreement, which specifies how a buyer is compensated when something isn’t as it was represented. How the indemnification is structured is open to negotiation and can directly impact the ultimate net proceeds in a given transaction.
Most deals include a general indemnification provided by the seller to the buyer against breaches of reps and warranties, which usually does not include carve outs for specific issues or items (i.e.: parties often agree that the general cap will not apply in the event of fraud). A percentage of the purchase price is placed into an escrow account or held back by the buyer to cover costs in case of a breach. This amount is subject to negotiation but typically ranges between 10 and 20 percent. How long the indemnification is active and how long funds are kept in escrow or withheld from the seller are also negotiated deal points.
Data suggests that deal size does impact both the term length and percentage of the escrow/ holdback. The indemnification duration for deals in the $10 to $100 million range is between 13 and 21 months, while this period can last as long as three years for larger deals. The indemnification cap as a percentage of total equity value (TEV) for the first half of 2012 averaged 23.8 percent on deals in the $10 to $25 million range, and averaged 5.5 to 12.2 percent on larger deals.
For more information contact:
Douglas Nix, CA | Vice Chairman CFA
905 845 4340 ext. 211