67% of M&A Acquirers Seek Post-Closing Purchase Price Reductions

I have been directly involved in several M&A deals.  And, for most privately held companies, M&A is the most typical liquidity event for investors/executives to ultimately realize value from their equity/options.

But, attention all you privately held CEOs of digital media and technology companies (as well as all others, by the way).  Take note!  Even if you lead your company to the promised land of successful M&A, the game ain't over (and believe me, M&A is a game fraught with pitfall-after-pitfall and is not for the inexperienced).  After the deal closes, much of the "fun" has just begun -- specifically with respect to the escrow fund that inevitably is part of your deal.

You see, virtually all M&A deals build in an escrow into the deal.  An "escrow" is a certain percentage of the actual purchase price (typically 15-25%) that is held back at closing as a fund to pay out certain claims that pertain to risks defined in the M&A purchase agreement (risks identified in the agreement's myriad of representations, warranties, and indemnifications).  That means that, let's say your company is acquired for $50 million, if your escrow is 20%, then only $40 million is paid to the acquired company at closing.  And, post-closing, the "game" is for the acquiring company to do everything it can to NEVER pay out that remaining $10 million (by closely and frequently aggressively scrutinizing every angle defined in the purchase agreement).  So, for you entrepreneurs, you should assume that your actual sale price is $40 million in that example -- essentially a purchase price reduction -- and that you are a very fortunate person if you ever see anything back from that held-back $10 million (EXTREMELY fortunate if you see the full $10 million).  Think of it as a bonus.  Really.

Why?  Because a full 67% of M&A deals see post-closing claims made by the acquiring company against the escrow.  In other words, 2/3 of all acquirers have succeeded in achieving a reduction of their purported purchase price.

This is a case most definitely of "seller beware!"  And, this demonstrates the great value to you being represented by a dealmaker steeped in experience in "playing the game."