Mergers and Acquisitions Facts I Fail to Understand
Private deal data that strikes me as odd
I am working on a new edition of my book, Mergers and Acquisitions (Concepts and Insights) (AMAZON LINK). As part of the process, I have been reviewing the American Bar Association’s Private Target Mergers and Acquisitions Deal Points Study (2025). In doing so, I’ve run into a number of things I find puzzling. In hopes that kind readers will enlighten me, I’m not putting this post behind the paywall.
You’ll notice that a recurring theme is trying to figure out why negotiators kick the can down the road by failing to define or otherwise specify what strike me as really important terms. It seems like an open invitation to subsequent disputes and litigation.
Purchase price adjustment provisions have become increasingly common in private deals. In 2006, for example, they were used in 68% of private company acquisitions. By 2019, they were being used in 95% of such transactions, although their use fell off to 90% in 2024-25. Was the drop between 2019 and 2025 random variance or driven by some market force?
In 2024-25, 12% of private company acquisition agreement post-closing purchase price adjustment provisions called for the use of GAAP in preparing the closing balance sheet, 10% for GAAP consistent with past practices, 32% for GAAP with specific modifications, 6% were silent, and 40% specified some other accounting method. ABA 2025 Private Deal Survey at 15. The relatively large number of deals that are silent on the point is somewhat puzzling, as it would seem to invite disputes.
The percentage of deals providing for a separate escrow for the purchase price adjustment has fluctuated over time, ranging from 23% in 2006 to 35% in 2010 to 25% in 2014 to 51% in 2018–19 50 58% in 20924-25. ABA 2025 Private Deal Survey at 16. Where a separate escrow was used, the percentage of deals providing for the escrow to be the sole source for making the purchase price adjustment, which effectively acts as a cap on the size of the adjustment, rose from 11% in 2016-17 to 42% in 2024-25. Id. What drove that increase?
Prior to 2008, less than 89% of private deals included a provision making indemnification the buyer’s exclusive remedy. Between 2008 and 2021, the percentage of such deals with an exclusivity provision rose into the >90% range, topping out at 87% in 2020-21. In 2022-25, the percentage fell back to 89%. Oddly, in the 2004 to 2025 period, the percentage of deals that were silent on the issue ranged from a low of 1% (2020-21) to a high of 14% (2004), with 6% being silent in 2024-25. ABA 2025 Private Deal Study at 112. It seems odd that such an important issue would be left unresolved, as it seems to invite litigation.
Why do some people write it as “earn-out” and some as “earnout”? I prefer the latter, but have been seeing the former in a bunch of recent cases and agreements. The ABA study uses earnout.
Material adverse change qualifiers are almost universal. Between 2006 and 2025 , the lowest percentage of deals including a MAC was 92% in 2008. In 2024-25, 99% of deals did so. ABA 2025 Private Deal Survey at 26. Curiously, a small percentage of deals contain MAC qualifiers but fail to define the term. See id. (2% of deals in 2022-23). Why would you leave such a critical term undefined?
In 2024-25, 21% of indemnification clauses in private company acquisition agreements included eligible claim thresholds. ABA 2025 Private Deal Study at 99. The percentage of deals with such thresholds has fluctuated widely over the years. The low during the ABA study period was 18% in 2006, while the high points were 39% in 2018-19 and 38% in 2014 and 2020-21. Id. Why so much variation from year to year?
In the ABA study, 28% of agreements that referenced RWI provided for the insurance to be the sole remedy but only for non-fundamental representations and warranties. Forty-six percent provided for it to be the sole source of recovery for all representations and warranties. Eight percent expressly said it was not the sole source of recovery, 11% permitted separate recovery for specified representations and warranties, and 7% were silent. ABA 2025 Private Deal Study at 125. The significant percentage of deals that are silent on such an important question is puzzling as it simply kicks the can down the road for future dispute resolution.
In 2024-25, 11% of private deals provided that the aggrieved party was entitled only to the termination fee and was expressly not allowed to seek specific performance. In 66& of deals, the agreement allowed the aggrieved party to seek either the termination fee or specific performance but not both. A surprising 23% of deals were silent, despite the seeming importance of this issue. ABA Private Deal Study at 24. Once again, why are they kicking the can down the road?
Terrific post -- the ABA survey data is always worth unpacking carefully. A few thoughts:
I'm skeptical that the decline in purchase-price use is random variance. More likely, this is a function of the increased adoption of RWI and locked-box deal structures, both of which suggest an increase in PE-to-PE deal flow.
On the escrow-as-sole-source increase from 11% to 42%: Same dynamic. When RWI is backstopping the deal’s rep and warranty exposure, buyers have already secured their principal risk mitigation through the insurance. That makes them more willing to accept a hard cap on purchase price adjustment exposure through the escrow mechanism. The escrow-as-sole-source provision becomes less threatening when it’s not the buyer’s only protection against a bad deal.
On silence as a drafting choice: The pattern you identify across multiple provisions — accounting methodology, exclusivity of remedy, RWI as sole source, termination fee versus specific performance — is the post’s most interesting thread. Sophisticated parties sometimes leave these issues unresolved deliberately, reasoning that the cost of negotiating to resolution exceeds the perceived probability of dispute. That calculation isn’t always wrong, but it tends to look very wrong in hindsight when the dispute materializes.
Best,
Daniel
"Earnout" is a portmanteau combining "earn" and "out". The hyphenated form illustrates this joining of "earn" and "out" to form a new word (the hyphen punctuation mark is used to join two words).
ABA publications use both spelling forms. For example, the hyphenated form of the word appears in "The Ins and Outs of Earn-Outs: A Delaware Perspective" by Richard Rose in Business Law Today.
Delaware cases use both forms. E.g., Winshall v. VIACOM INTERN. INC.
76 A. 3d 808 (2013) (earn-out) and Coleman v. PRICEWATERHOUSECOOPERS, LLC
902 A. 2d 1102 (2006) (earnout). Most likely, this reflects the parties' usage of the term.
Accountants use the term "contingent compensation" which the FASB defines in its Master Glossary as "Usually an obligation of the acquirer to transfer additional assets or equity interests to the former owners of an acquiree as part of the exchange for control of the acquiree if specified future events occur or conditions are met. However, contingent consideration also may give the acquirer the right to the return of previously transferred consideration if specified conditions are met." Therefore, the hyphen/no-hyphen debate could be avoided by adopting the accounting profession's terminology.