Fast Facts About the Use of Escrows
Median escrow size holding steady at 10%.
In 2018, the average escrow size as a percentage of transaction value was 9.3%, while the median was 10%, and the median escrow duration was 15 months.
- Escrow Size as a % of Transaction Value (Subset: 2017-2018 deals with escrows/holdbacks). 2018 Average = 9.3%; 2018 Median = 10.0%
- Escrow Duration – Survival Frequency (Subset: 2017-2018 deals with escrow/holdbacks). 2018 Average = 15.6 months; 2018 Median = 15 months
Escrow percentage 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 2016-2018)
Possible rationale for higher escrow value as a percentage of transaction value in smaller deals:
- Buyers get better terms due to negotiation leverage.
- Buyers perceive higher risk (low revenue, competitive intensity, value concentrated in IP)
Facts About Post-Closing Claim Activity
Post-closing Purchase Price Adjustments
- 74% of deals with a purchase price adjustment (PPA) mechanism had an adjustment
- 42% of deals with a PPA mechanism had a buyer-favorable claim for adjustment.
Average Expense Fund Sizes
- The average expense fund exceeds $250,000 for deals without earnouts and $350,000 for deals with earnouts.**
Claim activity was significant in deals with claims
- 42% of expired-escrow deals* with at least one claim had claims totaling at least $1MM.
- Fraud claims are by far the largest, and the only claim category for which the median claim size exceeds the escrow (127%).
- The frequency of claims increases with transaction value.
- Regulatory claims take the longest to resolve (13-months median), whereas capitalization and fraud claims tend to resolve quickly (1-month median)
* “Expired-escrow deals” includes deals where selling shareholders have no further escrow-based indemnification obligations.
** For a detailed analysis of SRS Acquiom’s life sciences deals, including earnouts, please see the 2017 SRS Acquiom Life Sciences M&A Study.