Middle market mergers and acquisitions (M&A) have been on the rise in recent years, with the middle market (defined as companies with revenues between $10 million and $1 billion) being a particularly active area for M&A activity. However, several key issues have emerged in the middle market M&A space that companies and their legal teams must be aware of.
One major issue is the increased use of earnouts in middle market M&A deals. An earnout is a provision in a purchase agreement that ties a portion of the purchase price to the future performance of the acquired company. For decades earnouts have been used in M&A deals, becoming increasingly common in middle market deals in recent years because they allow buyers to pay a lower initial purchase price while potentially realizing a higher return on investment if the acquired company performs well. However, earnouts can also create significant risk for buyers and sellers, as they can be difficult to value and may lead to disputes over the final purchase price.
“Crown Jewel” Provision
Another issue that has emerged in the middle market M&A space is using “crown jewel” provisions. A “crown jewel” provision in a purchase agreement allows the buyer to walk away from the deal if the acquired company’s specific asset or business unit cannot be transferred to the buyer due to regulatory or other constraints. These provisions have become increasingly common in middle market M&A deals as a way for buyers to mitigate the risk of regulatory approval issues arising after the agreement is signed. However, these provisions can also create significant risk for sellers, as they may only be able to close the deal if the crown jewel can be transferred.
Finally, the middle market M&A space has also seen many disputes over post-closing adjustments. Based on specific financial or other metrics, post-closing adjustments to the purchase price are made after the deal’s closing. These adjustments can be a significant risk for buyers and sellers, leading to disputes over the final purchase price
Middle market M&A deals present unique challenges and risks that companies and their legal teams should consider important. Whether you are a buyer or a seller, it’s essential to have experienced legal counsel to help navigate these issues and protect your interests.
If you have any questions or concerns about the trends listed or others not listed, please don’t hesitate to contact attorney Mathew Rabin for guidance or fill out the online contact form.