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Fast Facts About the Use of Escrows

  1. Average escrow size holding steady at 10%.

In 2016, the median escrow size as a percentage of transaction value was 10% and the median escrow duration was 16 months.

Escrow Size as a % of Transaction Value (Subset: 2016 deals with escrows/holdbacks). 2016 Average = 10.8%; 2016 Median = 10.0%

Escrow Duration – Survival Frequency (Subset: 2016 deals with escrow/holdbacks). 2016 Average = 16 months; 2016 Median = 16 months

2. Escrow size is larger with smaller deals.

Smaller deals as a whole have larger escrows on a percentage basis, and have greater variability as to the percentage held back in escrow. In some cases, the escrow can be as much as 50% of the total transaction value.

Transaction Value versus Escrow Size for Deals Under $50 Million (Data set: All deals closing in 2014-2016)

Possible rationale for higher escrow value as a percentage of transaction value in smaller deals:  1) Buyers get better terms due to negotiation leverage. 2) Buyers perceive higher risk (low revenue, competitive intensity, value concentrated in IP)

Facts About Post-Closing Claim Activity

  • 60% of deals have at least one escrow claim, including negative purchase price adjustments (PPAs)
  • 1.6 is the average number of claims per deal, including deals without claims
  • 24% is the average escrow amount claimed per deal, including deals with claims
  • Over 90% of claim types are related to negative PPA*, tax issues, fees/costs or intellectual property related issues
  • 21% of expired-escrow deals had claims totaling more than $1MM
  • Fraud is the most serious and expensive type of claim, followed by breach of fiduciary duty, contract, and IP issues

 

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