Part of the reason for that is many deals require 10% or more of the purchase price sit in escrow for more than a year. Greater than two-thirds of transactions can see purchase price adjustments after closing.
The difficult terms were uncovered by Shareholder Representative Services in a survey released today of more than 100 of its merger agreements.
It offers an ominous outlook for venture-backed firms as a tech shopping spree continues to look possible. The eight largest tech companies in the United States hold more than $300 billion in cash and are thought to be eager to add to their product portfolios.
“Entrepreneurs and investors who sell privately held companies face complex negotiations with outcomes that can have dramatic effects on net purchase consideration,” said the firm, which offers post-closing management services.
Among the survey’s key findings (see PDF on this page) are that:
* 59% of deals have escrows of more than 10% of the deal value. Two-thirds of escrows that last longer than a year.
* Two-thirds of deals have post closing purchase price adjustments.
* 95% of deals have carveouts for claims that can be brought well into the future.
* One-fourth of deals have earnouts. One-third of earnouts can extend beyond five years.
The study looked at deals done between July 2007 and July 2010. The transactions ranged from less than $25 million to more than $200 million in size with an emphasis on information technology, computer hardware, electronics, and consumer and business services companies.
If it is a sign of things to come, entrepreneurs will have plenty to think about as they contemplate that buyout offer from Cisco Systems, Apple or Intel.