With significant values at stake, negotiating the completion mechanism and Sale and Purchase Agreement (SPA) can be the difference between a successful and unsuccessful transaction. With the absence of definitive rules or standards for completion mechanisms, parties to a transaction often cite ‘market practice’ when negotiating how the initial offer price is converted into the final equity value paid for a business.
However, there has thus far been limited, publicly available data to determine what is meant by ‘market practice’.
As part of helping shape a vibrant economy, we are leading the way to establish and improve market best practice in SPAs. In 2016, we authored the Best Practice Guideline: Completion Mechanisms Determining the Equity Value in Transactions, published by the Institute of Chartered Accountants in England and Wales (ICAEW) and we published a UK market survey ‘A smarter way to get deals done’.
This year we expanded our research to identify market best practice around the world, obtaining the views of 563 respondents from over 400 different organisations in 13 countries.
We believe there is a smarter way to get deals done, where parties take closer starting positions on non-contentious areas and tackle contentious areas earlier in the deal process.
We hope that used together, the ICAEW Best Practice Guideline and our SPA market survey findings will empower principals and advisers to achieve smoother, more successful transactions.
This report presents the key themes identified by our international survey respondents. The detailed results are available in the appendices.
Our key findings this year include:
- The usage of the locked box mechanism has increased in the past five years (some 64% of respondents reported a rise – 70% in Europe, 45% in APAC, 43% in North America) and as advisors become increasingly familiar with the mechanism, we anticipate it will become more popular.
- Negotiating the value accrual differs internationally, with the ‘cash profits’ method being most popular in Europe. 71% of respondents agree that some form of ‘value accrual’ or ‘ticker’ adjustment is appropriate to compensate the seller for the time between the locked box date and completion, but there is no observed consensus on the conceptual basis or appropriate method for calculating this adjustment. In North America and APAC there is sometimes no value accrual applied.
- The working capital target is the most hotly debated area of price adjustment and deferred income is the most contentious individual balance sheet item. North America and APAC respondents were more likely to consider deferred income a working capital item (roughly 40% of respondents, compared to under 30% in Europe) rather than debt.
- Earn-outs are being used in around 40% of deals. The percentage was lowest in North America with earn-outs only used on around 30% of deals, and highest in APAC where earn-outs are used on almost half of deals. 76% of respondents reported that ‘Earnings Before Interest, Tax, Depreciation, and Amortisation’ (EBITDA) is the most common measurement basis for earn-outs.
- Completion accounts mechanisms and earn-out clauses take the longest time to negotiate and are the most common areas of post-deal dispute, with 23% of completion accounts mechanisms resulting in a dispute (formal or otherwise).