How buyers can get an edge in middle-market deals: it's a sellers' market out there. Two attorneys argue that buyers need to avoid overpaying and focus on the markup and negotiation of the purchase agreement.

• Author: Elowe, Wayne H.

It is fairly common knowledge that these days in the M & A business, sellers have the advantage. A number of factors have contributed to the situation: an oversupply of capital chasing too few quality deals, buyers paying higher transaction multiples, a more sophisticated base of sellers using auctions to drive higher prices, strategic and financial buyers in heavy competition. The list goes on.

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Market conditions aside, both strategic and financial buyers continue to have marching orders to find and close deals that will pay off in the future. Once a target company is identified, the next major challenge is how to position oneself to become the selected suitor and avoid overpaying.

Confronting this challenge can involve a number of factors that can affect the transaction process. Buyers can approach the mark-up and negotiation of the purchase agreement to better position themselves in a competitive acquisition process and effectively negotiate a reasonably balanced agreement.

Current Purchase Agreement Terms

We frequently hear stories that the terms of private company acquisitions are moving in the direction of limited seller representations and warranties and even more limited rights of recourse, post-closing. While there are undoubtedly examples of over-zealous buyers giving in to a seller's draft agreement simply to win the deal, purchase agreements still tend to contain many of the provisions that buyers typically seek: comprehensive representations and warranties, purchase price adjustments and indemnification rights--sellers are not walking away with premium prices without standing behind their businesses.

Indemnification rights provide a good illustration of this point. Indemnity survival periods may be somewhat shorter, but still tend to cover one or two audit cycles; "baskets" have been ranging between 0.5-1 percent of transaction value; and caps are in the 10 percent to 50 percent range. Representations and warranties, if anything, have become more targeted on specific aspects of the seller's business.

(A "basket" in an M & A deal is like a deductible: if there is a basket of $1 million, then after closing, before a buyer can bring an indemnity claim against the seller, there must be damages greater than $1 million. Sometimes, depending on the deal, once the damages exceed the basket, the buyer can either recover the amounts in excess of the basket or can recover all of the damages going back to the first dollar; this is a negotiated point. The purpose is to avoid non-material indemnity claims between the buyer and seller.)

Are buyers caving-in to the demands of the sellers? Yes and no. Buyers understand that the pendulum has swung in the sellers' direction. Buyers have had to "give in" at times, altering their usual...