Inaugural Seward & Kissel M&A Study Finds Seller-Friendly Market for B2B Services Firms
M&A deals in the lower to middle market of the business-to-business services sector consistently reflect seller-friendly terms, according to a new study of such transactions between 2016-19 conducted by Seward & Kissel LLP. The study also shows, however, that the sellers’ advantage was tempered in deals of less than $100 million, where buyers obtained more favorable terms.
The full report, “Identifying Trends in B2B Services M&A: A Study of the Principal Deal Points in the Lower and Middle Market,” is available here. Seward & Kissel based its conclusions on an in-depth analysis of transactions below $500 million for companies providing information, marketing, training, advisory, and other B2B services.
M&A activity has been strong in this sector for almost a decade, and our report sheds important light on conditions in the market over the last three years,” said Nick Katsanos, a partner in Seward & Kissel’s Business Transactions Group and the lead author of the study. “Among other insights, the data suggests as deal sizes get smaller, so does buyers’ tolerance for risk.”
The study found that smaller transactions are driving much of the deal activity in the lower and middle market. The average deal size was $115 million, while two-thirds of transactions were valued below $100 million. Less than 20% of the transactions reached $250 million or more.
Critical deal points that generally favored sellers include indemnification baskets, which require a buyer to incur a threshold amount of losses before it can receive indemnification from a seller. Nearly every deal studied included an indemnification basket, and most operated as a true deductible (meaning the buyer would only be entitled to indemnity for losses exceeding the basket amount). Far fewer transactions, by contrast, featured escrows or holdbacks, which protect buyers in the event they have to make indemnification claims against sellers.
That said, the results indicate that buyers had more leverage in smaller deals. While only 52% of all deals included escrows or holdbacks, for instance, more than 70% of those valued below $100 million included this buyer protection.
Other key findings include:
- The average cap on seller liability for breaches of non-fundamental representations and warranties was 6.5% of the overall purchase price, increasing slightly to 7% for sub-$100 million transactions.
- In asset acquisitions, the average deductible basket as a percentage of purchase price was .93%, which fell to .57% in stock acquisitions.
- More than 40% of transactions used representations and warranties insurance.