The M&A process can be long and complex. Buying or selling a company requires meticulous planning, experienced professionals, and an appreciation of the deal dynamics involved in negotiations.
Companies that have not been involved in previous M&A transactions commonly make mistakes that result in mispricing, unfavourable terms or a failure to complete – which could have otherwise been avoided. This article describes the core issues surrounding an important element in M&A transactions that private buyers and sellers should consider.
3 Key Issues Regarding Escrows.
An escrow is a common risk-mitigation tool which is becoming used in a majority of M&A deals. An escrow is a negotiated portion of the purchase price that is temporarily held by a third party to protect the acquirer in case they incur losses due to breaches of the seller’s representations and warranties. Key questions involved with holdback escrows include:
- Terms:
Typical terms include an escrow dollar amount that could be up to 25% of the total purchase price, with a minimum escrow period of 6 to 18 months from the date of completion. - Exclusivity:
Most selling companies will try to secure their exposure to post-closing indemnification claims by negotiating that the escrow be the exclusive remedy for breaches in representations and warranties in the acquisition agreement. - Exclusions:
Buyers who agree to the “exclusive” nature of the escrow will, however, seek an exception for losses due to fraud and other such matters – even though the selling company will try to prevent these broad exclusions. In such cases, the outcome is highly dependent on the skill of the negotiating teams.
Management Advisors Pty Ltd is a highly sought after independent financial services firm and investment bank. Their team has extensive experience in initiating, sourcing and negotiating M&A transactions to completion.