Key Takeaways from SRS Acquiom’s 2024 M&A Deal Terms Study, Working Capital Purchase Price Adjustment Study, and Trends to Watch in 2025

SRS Acquiom Inc. has released 

• the “2024 M&A Deal Terms Study” which is based on an analysis of deal terms in over 2,100 private-target M&A transactions worth over USD$475 billion and which closed between 2018 and 2023;
• the “2025 SRS Acquiom M&A Working Capital Purchase Price Adjustment (PPA) Study” which analyzes 1,250 private-target acquisitions worth over USD$298 billion which closed from 2020 to Q3 of 2024; and
• the “Three M&A Trends to Watch in 2025” Study based on Q1 to Q3 of 2024 deals tracked from its MarketStandard database. 

We have compiled the findings from these three reports, and our key takeaways on some of the most salient topics are as follows:

Valuations

• The recurring trend of lower valuations and a focus on lower mid-market deals (i.e., those being less than $50 million) observed in 2022 continued through 2023, with the median return on investment for 2023 deals falling to 2.5x from 4x in 2022. Additionally, there was a continued rise in the median exit timing for M&A targets from 6.5 to 6.7 years, likely reflective of sellers holding out hope for a market upturn prior to their exits.
• A suggestion that things are heading in a new direction. There has been a resurgence in the number of jumbo deals (those valued at over $750 million) as the first three quarters of 2024 saw a notable increase in high cap deals representing more than 10% of M&A activity, compared to just 3% in 2023.

Deal Structure

• While the categories of buyer have remained relatively stable over the past five years, an interesting trend noted in 2023 was the relative increase in U.S. public and private strategic buyers with a corresponding drop in P-E backed U.S. private buyers (i.e., portcos). That being said, 2024 had more activity from private equity buyers generally, particularly portcos, as shown in the “Three M&A Trends to Watch” in 2024.
• Though the early part of 2023 saw increased use of buyer equity as part of the consideration mix similar to 2022, all-cash deals became more prevalent towards the third quarter of the year. This was also flagged in the “Three M&A Trends to Watch”, as the trend towards all-cash consideration continued to gain momentum in 2024, with 80% of deals in 2024 involving all-cash consideration (or a form of cash and management rollovers). This is up from an already high 74% in 2023. These numbers from the past two years seem to highlight a key shift in market dynamics in this respect.
• Also worth noting was a 70% year-over-year increase in deals featuring management carve-outs, demonstrating an increased pressure from sellers for higher valuations. SRS defines such carve-outs as a portion of deal proceeds guaranteed to the seller’s management when management would otherwise receive little or nothing for their equity ownership due to liquidation preferences. These exclude transaction bonuses.

Purchase Price Adjustments

• A decade ago, only about 50% of private-target M&A deals included purchase price adjustment mechanisms (“PPAs”). Today, they are nearly universal, with more than 90% of private-target M&A deals and over 95% of private-equity backed M&A deals incorporating them.
• In 2024, 75% of M&A deals with a PPA included a separate PPA escrow. The median size of such PPA escrow has increased to around 1% of transaction value over the past two years, with around 25% of PPA claims exceeding the 1% threshold. That said, there has been a steady decline in the percentage of PPA escrow claimed, with an average of 74% claimed in 2020 dropping to just 19% claimed in Q3 2024. While it used to be that most working capital surpluses were buyer-favorable, deals closed in 2024 showed an increase in seller-favourable working capital surpluses, now making them nearly as prevalent as seller-favourable claims.
• There is an important and material shift in accounting methodology for PPAs. For the first time, the “worksheet” approach, which relies on a specific calculation methodology or schedule, has surpassed the “GAAP consistent with the target’s past practices” method as the most common approach, being applied in over one third of deals. In addition, the median size of separate PPA escrows reached 1% of the transaction value, reflecting a new standard in deal structuring.

Earnouts

• One third of 2024 private-target M&A deals included an earnout provision. While it is true that the use of earnouts has been steadily on the rise, this represents a substantial increase (over 50%) from the previous year-over-year numbers. 2024 saw a return to the historical norm of roughly 1 in 5 deals, suggesting that 2023 was a true anomaly in this respect. It will be interesting to see whether 2025 stays in line with this average.
• The median earnout potential as a percentage of closing payment has been modestly increasing since 2021, but increased substantially from 32% in 2023 to 43% in the first three quarters of 2024. Therefore, while fewer deals in 2024 have included earnouts, more dollars are at play when they do.

Indemnification

• The use of special escrows has seen an upwards trend, with nearly half of deals with Representations and Warranties Insurance (“RWI”) having an additional escrow for purposes other than general indemnification. The median size of general indemnification escrows remained steady at 10% of transaction value for deals without RWI and 0.5% for deals with RWI.
• With respect to indemnities, indemnification provisions in deals have also changed, with a decrease to 21% in the number of “walk-away deals”, meaning those with no survival of sellers’ general representations and warranties post-closing. This indicates a shift back to a more buyer-friendly and balanced market from the seller's market trend we have seen since 2021. Further, the median survival period for these representations and warranties returned to a median of 12 months.
• RWI continues to have material effects on various deal terms. 88% of RWI-identified deals include separate PPA escrows, and RWI-inclusive deals show an increased use of “no other representations” and “non-reliance” clauses, lower likelihoods of survival periods for representations and warranties, fewer deals with pro-sandbagging provisions, and a lower likelihood of materiality scrapes. Buy-side RWI is also correlated with a higher likelihood for sellers’ indemnification obligations to be structured as deductible baskets, rather than first-dollar baskets, and RWI deals have shown to materially affect the average escrow/holdback amounts and caps.

Conclusion

The three studies recently published by SRS Acquiom provide key data on the trends observed in the M&A landscape over the past few years, as well as some important insights on what might be to come as we enter 2025. We leave you with the following high-level takeaways:

• While lower mid-market deals remain prominent, recent trends show an uptick in larger deals. Across the board, a move to all-cash transactions and a decrease in the use of earnouts show some movement towards simplifying complex deal structures.
• There has been some movement in the use and specifics of the PPA mechanisms, with the almost universal usage by sophisticated private-equity buyers likely driving the move to more tailored mechanisms in this regard.
• As we potentially move back towards a more balanced or buyer-friendly market, we are seeing an increase in the use and size of general and specific indemnification escrows, and a substantial reduction in the number of pure "walk-away deals". As always, the impact on RWI on all areas of M&A transactions cannot be understated, particularly regarding indemnification terms. 

Keep an eye out for more insights and important takeaways as we move into 2025!