Identifying market practice for equity value adjustments and Sale and Purchase Agreements
An active deal environment is a vital ingredient for a vibrant economy and an essential growth driver for many businesses and investment returns. At the heart of every deal is a Sale and Purchase Agreement (SPA) that defines both the terms of the transaction and the basis for deriving a purchase price on which the seller and purchaser both agree.
Successful deals benefit from clarity, trust and integrity. There is currently a lack of common ground about what constitutes generally accepted market practice when agreeing equity value adjustments and how they are reflected in the SPA.
To seek much needed clarity, we gathered views from more than 150 deal participants – buyers, sellers and advisers – about what constitutes market practice. Our research draws on the collective experience of these deal experts, who between them have conducted thousands of deals. As a result, we can provide you with insights that will enable practitioners to make better-informed decisions when next having to negotiate the equity value adjustments and the SPA.
Key themes from the survey:
- Locked boxes are becoming increasingly popular
- The most common type of post locked box period value accrual is one based on a "cash profits" methodology
- Deferred income is the most widely debated value-adjusting item during price adjustment negotiations
- There are a number of other key value-adjusting items which can cause contention on deals, such as working capital target, stock, free cash and debt-like items
- A higher proportion of time spent on pre-deal negotiations does not necessarily lead to a reduced level of disputes
- Completion accounts are the most common area of post-deal dispute
- Locked box disputes are rare, but may see a modest rise in the future
- Warranty and indemnity insurance is becoming more commonly used
- Earn-outs are prevalent and becoming more common, both to incentivise management and to bridge valuation gaps