BOSTON--(BUSINESS WIRE)--Buyers and sellers should plan for post-closing claims that delay or reduce the eventual payout of cash to sellers, according to a new study released today by SRS | Shareholder Representative Services. Of the transactions surveyed, about a third of the escrows were released late due to claims, with the average delay being nine months after the end of the holdback period, while sellers received less than the full amount held in escrow in more than a third of deals that have been fully resolved.
The findings come from the 2011 SRS M&A Post-Closing Claims Study, a first-of-its-kind analysis of more than 125 private-target escrows and holdbacks for deals from a variety of industries that closed between 2007 and 2010. The analysis includes data on the frequency and magnitude of claims, timing of claims and releases, resolution of claims, and purchase price adjustments.
Although the majority of deals (56%) have claims against the escrow, the Study reports that most of the consideration set aside is eventually released to the selling shareholders (86%). One of the key reasons that shareholders recover such a significant percentage of the escrow is that claims are frequently negotiated, often leading to a reduction of the claims for damages, with some being withdrawn altogether. Still, parties to mergers should be aware of the time and resources required to reach a resolution. The Study reveals that claims take an average of eight months to resolve.
SRS conducted the study to help dealmakers assess the risks associated with selling a company. This has historically been a challenge for the parties to a transaction, in part because they do not know how likely they are to find themselves in a post-closing dispute that results in a purchase price adjustment. Prior to the release of this study, little information or data existed on how often claims are made, what those claims are likely to be, how often they take to resolve or the eventual impact on the economics of the deal.
“Anyone in the business of buying or selling private companies will find this data extremely useful,” said Steve Simonian, CFO at August Capital. “SRS’ analysis helps investors assess the total return on the acquisition of a portfolio company and plan for what might come up post-closing, including delays in the eventual payouts.”
SRS has posted a summary of the 2011 SRS M&A Post-Closing Claims Study on its web site, www.shareholderrep.com.
Other highlights of the study include:
- Purchase price adjustments (typically working capital adjustments) are made more often than not (62% of the time) when there is an adjustment mechanism.
- Indemnification claims are often paid out to buyers but at reduced amounts: 85% of claims are paid, but 82% of those were reduced from the original amount sought.
- 4% of deals with at least one claim resulted in litigation or arbitration between the buyer and shareholder representative.
“Armed with the right information, parties to mergers can assess what to expect after closing in a more meaningful way,” said Paul Koenig, Managing Director at SRS. “This SRS study should help investors plan in a variety of ways, including projecting how much of the cash tied up in escrow will be released to them and when it will be available to be redeployed.”
About SRS Information Products
The 2011 SRS M&A Post-Closing Claims Study is the third in a series of information products related to the negotiation and finalization of private company sales. In 2010, SRS published Tales from the M&A Trenches: Pre-Closing Practices to Mitigate Post-Closing Risks, a comprehensive new manual of drafting tips, flags, and best practices written exclusively for dealmakers to help avoid post-closing problems when negotiating M&A agreements. SRS has also recently published its 2010 SRS M&A Deal Terms Study, the first in-depth analysis of private-target acquisition agreements for deals from a variety of industries that closed between 2007 and 2010. All three SRS information products are available at no cost to SRS clients and partners.
SRS | Shareholder Representative Services is the leading expert in professionally managing the post-closing process to safeguard the selling shareholders’ interests in private company M&A transactions. As the shareholder representative, SRS manages all post-closing matters, including working capital and other purchase price adjustments, tax reviews, the handling of claims, disputes and litigation, communications with acquirers and selling shareholders, and management and distribution of escrow and expense funds. On deals valued in aggregate in excess of $16 billion, SRS has represented more than 400 venture capital and private equity firms and over 19,000 shareholders in 44 countries. No one has as much knowledge and experience in serving as a shareholder representative and navigating the issues that arise post-closing than SRS. For more information, visit www.shareholderrep.com