m&a deal trends summary,2009
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8/7/2019 M&A deal trends summary,2009
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Capital Region Business Journal | March 201
LEGAL ADVICE
The purchase and sale o businesses
are a key part o the U.S. economy
and a common method by which
business owners realize the value o their
entrepreneurial eorts. Although every
sale transaction is dierent, deals oten
contain similar legal structures and provi-
sions.
A helpul resource regarding current
marketplace terms is prepared every
ew years by the Mergers & Acquisitions
Committee o the American Bar Associa-
tion. The recently released 2009 Private
Target Mergers & Acquisitions Deal Points
Study analyzes 106 publicly reported M&A
transactions that range rom $25 million
to $500 million. Even or business sales o
less than $25 million, the study provides a
useul benchmark o what terms and con-
ditions in an acquisition agreement may
be considered “market.”
In any acquisition, there are generally
our main parts to the denitive agree-
ment: a description o the purchase price
and terms related to what is purchased;
closing conditions; representations and
warranties o the seller regarding the tar-
get’s business; and indemnication obliga-tions o the seller ater closing. While the
study analyzes many provisions and trends
in acquisition agreements since 2004, we
will highlight the provisions described in
the study that relate to: (1) adjustments
to the cash purchase price received by the
seller; and (2) what portion o the pur-
chase price is subject to claims made by
the buyer or third parties.
Adjustments to cashreceived at closing
For the seller, the most important
term o any business sale is usually the
purchase price, and the most important
part o the purchase price is usually the
cash received at the closing. Two common
terms o deals that directly aect the cash
received at or shortly ater closing are
post-closing purchase price adjustments
and holdback escrows.
Purchase price adjustments start with
the idea that the business will have an
adequate amount o working capital at the
closing but that the various elements o
working capital will vary rom day to day
in the normal operation o the business.
To account or those variations, and to
remove any incentive o the seller to drain
the working capital prior to closing, an
increasing majority o deals (79 percent in2009, up rom 68 percent in 2006) include
a post-closing purchase price adjustment
or variations in working capital and
sometimes other assets or liabilities such
as specied debt.
Most o the time, an estimated working
capital number is calculated by the seller
and a payment based on that number is
made at closing. Then, the buyer prepares
a post-closing balance sheet. Ater some
sort o approval and dispute resolution
process, the closing balance sheet is con-
rmed, and the buyer or seller “trues up”
the dierence between the estimate andthe nal number. In some recent deals, we
have seen buyers and sellers dier on the
calculation o working capital. One good
way to reduce the risk o diering inter-
pretations is to have a sample calculation
based on a prior balance sheet incorpo-
rated into the agreement and adjustment
process.
About 80 percent o deals include an
escrow or holdback rom the cash paid at
closing to back up the seller’s indemnity
obligations or to und any buyer obliga-
tion or a working capital adjustment. The
median amount o holdbacks was about 10
percent o transaction value. The amount
o the holdback is important but the
indemnity terms that determine how and
how much o the holdback can be claimed
by the buyer should be the primary ocus
o the seller.
Later claims of buyer or others
Indemnication obligations o the seller
can arise rom several actors but in large
part come rom obligations related to
non-assumed liabilities by the buyer and
breaches o representations and war-
ranties by the seller. For example, i the
seller represents that all o its inventory
is in good and saleable condition and it
turns out that 25 percent o the inven-
tory is obsolete, then the buyer will likely
have an indemnication claim against the
seller. Sellers can limit their indemnica-
tion obligations ater the sale in two main
ways. First, the agreement can establish an
overall indemnication cap; and second,
the buyer and seller can establish what iscalled a “basket.”
An indemnication cap limits the
overall liability o the seller ater the clos-
ing, and 92 percent o the deals analyzed
included a cap. O those transactions,
the cap equaled the transaction price
in 4 percent o the deals (down rom 7
percent in 2006 and 14 percent in 2004),
and the transaction caps were less than
the purchase price in 86 percent o the
transactions (as compared to 88 percent in
2006 and 74 percent in 2004). The mean
cap was 21.72 percent and the median cap
was 11.19 percent o the transaction value.However, even when agreements include
caps, the agreement will also exclude som
claims that are not subject to the cap,
such as raud and the breach o certain
key covenants. Generally, caps will be a
smaller percentage when the purchase
price is larger. Given the buyers’ market in
2008 and 2009, indemnication caps have
trended upward.
Another way to limit liability or the
seller is to establish a “basket.” When a
Study gives inside look at trendsin mergers and acquisitions
Rochelle h. KlasKin
and Paul J. KaRchare shareholders and members of Godfrey &Kahn’s Corporate Practice Group. For moreinformation, Rochelle can be reached at 608-284-2607 or [email protected]. Paul can bereached at 608-284-2252 or [email protected].
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