It's a Buyer's Market

  

Credit: Natalie Maynor

I had lunch yesterday with one of the top M&A lawyers in Sydney.  We talked about the dramatic decline in prices being offered for assets, and he commented on an equally clear shift he has observed in the deal terms that private equity firms are demanding before they'll invest.

Some of these "buyer's market" changes include:

Earn-outs are becoming more common in PE deals.  This slightly surprised me because earn-outs (where the total purchase price paid depends on the future performance of the company) are notoriously painful to negotiate and their enforcement can do more damage than good.

Escrow of sale proceeds:  PE firms are increasingly insisting that a portion of the sale proceeds be placed in escrow to provide security for potential warranty claims.

Seller liability caps on warranties are increasing, with caps of 50% or more of the purchase price now common.

Warranty and indemnity time periods have lengthened . . . 2-3 years is the new 12 months.  Warranties are also more likely to be given at both signing and completion, and the de-minimis levels for warranty claims have come down.

Material Adverse Change (MAC) clauses are being included in most transactions to protect against a negative event between the time of entering into a purchase agreement and closing the deal.

Non-compete provisions are extending . . . though uncertainty and debate still remains about their enforceability.

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