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When someone is buying your business or you are acquiring one, what are the customary deal terms you should agree to? Robert Dickson (pictured) of Mason Hayes & Curran has the answers.

Each year Mason Hayes & Curran carries out a detailed study of the private Mergers & Acquisitions it advised on over the previous year to ascertain up-to-date negotiated deal trends. The latest Study covered the 15-month period to March 2019, analysing the terms of significant Irish deals in a wide range of sectors including technology, life sciences, energy, food & beverage and consumer services.

Locked Box

There has been an increase in the proportion of transactions which use a locked box pricing mechanism. That said, completion accounts have continued to be used in a majority of the transactions we advised on during this period. A large minority of the transactions had an earn-out or deferred consideration element in them.

Escrows

A large minority of the transactions analysed had an escrow component. Escrow Accounts appear in M&A transactions as a way of providing purchasers with greater comfort and ease of recovery where there has been a breach of a warranty or indemnity. Where an Escrow Account was opened, we analysed the percentage of consideration placed into escrow. The percentage is partially a function of the transaction size, but 6% to 10% of the consideration was the general range.

Warranties & Indemnities

The Study indicated that specific indemnities such as protections relating to a known subject of concern about the target business, an ongoing claim, or as an additional protection to the suite of warranties, were included in the share purchase agreements in a strong majority of the transactions in the review.

The time limitations for warranties were shorter than those in the previous studies, in line with international trends. Similarly, the financial limitations, taken as a percentage of the total consideration paid for the shares, were significantly lower than had been the case in previous studies.

In Association with

We have also seen a rise in the use of Warranty and Indemnity insurance in M&A transactions. For certain types of private M&A transactions such as auctions and private equity, this is now a customary aspect of deals.

In the Study we noted a financial limitation being applied to ‘General’ and ‘Tax’ warranty claims in all the transactions analysed. A financial limitation was applied to half of the ‘Fundamental’ warranty claims in those transactions.

US Norms

US trends continue to play their part in the market, as US acquirers often impose their norms on Irish transactions to which they are party. For example, a small minority of deals analysed involved warranties being given on an indemnity basis, which would generally be very unusual in Ireland.

Overall, the changes observed in our 2019 M&A Study, while buyer-friendly in a few instances, generally indicate an increasingly seller-friendly market, as the availability of finance and the shortage of businesses for sale continues to lead to strong competition in auction and sales processes.

It is important for all involved in driving an M&A transaction to a conclusion to be aware of up-to-date market norms. They provide a solid platform for the negotiations, and ensure that off-market positions are not unknowingly accepted by a buyer or seller of a business. Such norms also inform which concessions are appropriate to accept as the negotiations progress.

• Robert Dickson is a Corporate Partner at Mason Hayes & Curran. For more information on the M&A study contact Robert at rdickson@mhc.ie.