How to Avoid Complications with M&A Escrows and Payments

M&A transactions are multifaceted and complex. The team at SRS Acquiom offers these tips to help minimize delays and complications by keeping these escrow and payment considerations top of mind.  

M&A Escrows and the M&A Payments Process: Streamline the Deal Process Through Post-Closing  

In today’s uncertain economic climate and evolving M&A market, the truth that no two M&A transactions are the same is more evident than ever. Deals reflect a balance between sellers, who want to capture as much value as possible, and buyers, who want to ensure their investment is a good one and protect against unforeseeable closing and post-closing issues.  

In an M&A deal, buyers and sellers typically ensure that the obligations of the deal will be met with the establishment of an escrow fund. Held by an independent, third-party, escrow funds help provide assurance that the terms and conditions of the transaction will be met by each of the deal parties, and if not, claims can be made for renumeration from the escrow fund to cover damages.  

Optimizing M&A Escrows 

 SRS Acquiom data shows that 91% of M&A deals include escrow funds.¹ M&A escrows ensure that funds are readily available for buyers in the event of a post-closing claim. Escrow funds may also protect sellers from having to pay back any consideration received if there are any claims for losses due to factors such as a breach of representations and warranties. Here are three tips for optimizing escrows in an M&A transaction: 

1. Size the M&A escrow fund appropriately—typically at 10% of transaction value. 

   SRS Acquiom data shows that the median escrow size as a percentage of transaction value has held steady at 10% of transaction value when no M&A insurance is used.¹ If there is representations and warranty insurance used on a transaction, the size of the escrow can be less, with a median amount of 0.5% of the transaction value.¹ Increasingly, deal parties are also including special purposes escrows.¹ 

2. Structure the M&A escrow to benefit both buyer and seller. 

   If structured appropriately, the buyer benefits from having money readily available should they need it as security for claims that may affect the value negotiated for in the acquisition agreement. They do not have to contact shareholders after closing to claw back money already paid or create tension with people who may now work for them after completion. 
   
   The seller also benefits from more certainty as to the proceeds they receive at closing, and a higher level of comfort that they will keep such amounts. With an appropriate escrow fund in place, the buyer will likely not need to claw back more than the amount in escrow to satisfy any claims for losses after closing.   

3. If putting shares in the M&A escrow is unavoidable, issue a single share certificate held in the name of the escrow agent. 

   While cash escrows are the prevailing practice, if the parties decide on escrowed shares, there are two ways to structure how those shares are held:  

   1. Single share certificate in the name of the escrow agent 
   2. Individual certificates in the names of each shareholder based on their pro rata ownership of the escrow fund 

The second option may prove burdensome in a situation where the buyer claims shares from the escrow fund, as every share certificate would need to be reissued with the newly calculated and reduced ownership amount of each individual shareholder. For that reason, the first option is preferable because it allows for only one certificate to be updated any time there is a reduction in the escrow value.  Individual certificates can then be cut at the time of the final escrow release of any remaining shares to the sellers. 

 Streamlining the M&A Payments Process 
 
When navigating the M&A payments process for investors, clients, and ultimately shareholders, M&A deal parties often face complex, multidimensional needs to optimize the transaction. They may be looking to fund the acquisition or merger through cash, stock or equity, or a combination of funding methods. Upon deal closing, they may be looking to offer funding and compensation to investors and shareholders in their preferred currencies of choice. 

M&A deal parties can help ensure timely, more efficient payments with the use of an experienced paying agent and tools such as integrated foreign currency exchange and a reporting dashboard that displays useful information across all deals.  Here are three tips for streamlining the M&A payments process: 

1. Use a professional paying agent.  
   
   Enlisting a paying agent with the right experience and technology tools —including knowledge about tax reporting—helps to eliminate undue stress when it comes to handling the administrative tasks of the M&A payments process. Not using an M&A paying agent may pose several issues and put the deal at risk. For example: 

   Using an escrow agent to distribute M&A deal proceeds to shareholders may work if there are only a few shareholders to pay, but the escrow agent is not responsible for collecting shareholder payment instructions at completion. This responsibility would therefore remain with the buyer or the sellers and could make for a more cumbersome, less efficient transaction.

2. Save time with integrated FX  

   SRS Acquiom data shows that M&A deals increasingly have cross-border characteristics. To ensure payment efficiency, and with integrated FX technology, an experienced paying agent can help parties negotiate the entire deal in a single currency while individual vendors receive their payments in the currency of their choosing. They can also help deal parties avoid additional fees and unfavorable exchange rates.

3. Use an online deal dashboard to review and store documents.  

   These portals enable M&A deal parties to easily and securely collect and track the necessary bank account details and personally identifiable payment information for prompt, accurate payment distribution to shareholders. Deal parties have access to document collection and necessary materials 24 hours a day, seven days a week, and all data is protected at rest and while in transit—ensuring both integrity and speed of access.

Summary, Escrow M&A: Escrows for M&A Transactions 
 
The escrow fund provides a direct recourse should the buyer incur indemnifiable losses, such as due to a breach of seller’s representations and warranties. After the close of the deal, the buyer has a period, typically 12 to 18 months, where they can inspect the target company to ensure the accuracy of those representations. 

Tips for M&A Escrows 

1. Size the escrow fund appropriately—the general indemnification escrow is typically funded at 10% of the transaction value. It is essential to consider all relevant factors when sizing an escrow fund. To learn more about this data, please see the SRS Acquiom 2024 M&A Deal Terms Study. 
2. Structure the escrow to fit the needs of both buyers and sellers. 
3. Avoid escrowing shares, but if the deal necessitates it, issue a single share certificate held in the name of the escrow agent. 

Tips for Streamlining M&A Payments 

1. Use a professional paying agent.  
2. Save time with integrated foreign currency exchange. 
3. Utilize technology to efficiently review and store documents.  

Plan for More Efficient Deals  
A broader perspective in the early stages of a deal can be highly impactful to deal parties, particularly with escrows and the M&A payments process. Engaging professional M&A escrow agents and paying agents can help deal parties strategically size and structure escrow funds, leverage M&A technology, and avoid potential pitfalls before, during, and after deal completion. 

¹ Source: 2024 M&A Deal Terms Study