2024 M&A Deal Terms Study
Key findings of deal terms in private-target M&A transactions that closed between 2018–2023
Valuations
- Deal size trends observed in the 2022 M&A market continued into 2023: lower valuations and a focus on lower middle-market (less than $50 million) deals.
- The median return on investment for 2023 deals was 2.5x, down from 4x in 2022. The median exit timing for M&A targets continued to rise.
- There was a 70% increase year over year in the percentage of deals with a management carveout, likely indicative of further pressure on valuations.
Deal Structure
- Strategic buyers (both U.S. public and private) were more active in 2023, with a corresponding substantial drop by U.S. private buyers backed by private equity (e.g., portcos).
- While the first part of 2023 saw increased usage of buyer equity as part of the consideration mix similar to 2022, as of the third quarter last year, all-cash deals are slowly on the rise.
- “GAAP consistent with the target’s past practices” is for the first time no longer the majority practice when establishing the accounting methodology for PPAs; the “worksheet” approach is now used on more than one third of deals.
- The median size of separate PPA escrows has now reached 1% of transaction value.
Earnouts
- One third of 2023 deals included an earnout, which is more than a 50% increase year over year (close to one fifth of deals in the previous three years included an earnout).
- The amount of contingent consideration tied to earnouts also ticked up slightly.
Deal Escrows
- Use of special escrows (in addition to the general indemnification escrow) is on the rise, with nearly one half of deals with RWI including an escrow for something other than general indemnification or the PPA.
- The median sizes of indemnification escrows held steady at 10% of transaction value for deals without RWI identified (0.5% for deals with RWI identified).
Indemnification
- The number of deals with no survival of seller’s general representations and warranties (i.e., walk-away deals) decreased in 2023.
- The median survival period for seller’s representations and warranties went back down to 12 months, but the average held steady.
Effect of RWI
- The presence of Representations and Warranties Insurance (RWI) can materially affect certain deal terms, including use of a separate purchase price adjustment escrow, certain seller representations and survival, sandbagging, materiality scrapes, baskets, caps, and escrows.