If you are a Seller you should be concerned with the possibility of post-closing claims by the Buyer. And that is particularly true if you have co-owners not involved with the business who have minority interests…they will generally not be very understanding if they are required to give back some of their sales proceeds.
For reasons not appropriate to a discussion here, post-closing claims are generally limited to sales of privately held (i.e. not public) companies, and, accordingly, little information concerning such claims has historically been publicly available. However, Shareholder Representative Services, a company which provides profession post-closing management of shareholders rights and liabilities, recently came out with a study of such claims, entitled the 2011 SRS M&A Post-Closing Claims Study, and several of its findings are worth noting:
- You should expect a claim to be made: 56% of the 128 surveyed deals involved a claim.
- You should anticipate that the claims may not be made until just before the escrow release date: almost one quarter of the deals had claims filed in the last week.
- You should anticipate a possible delay of the final escrow release, as such delays occurred in one third of the deals.
- Many so-called claims are adjustments to the net working capital requirement (I say “so-called” because while it is technically a claim, both parties generally anticipate that an adjustment will be necessary – I think of it as as “known unknown” rather than an “unknown unknown” (such as failure to disclose a liability) which is more typically thought of as giving rise to claims).
- Most all claims are resolve within 12 months (intellectual property, customer contract and fraud claims take the longest). Those fact support the notion that a 12 month escrow is generally adequate.
- And finally, the good news: an average of 86% of the initial escrow amounts was release to shareholders.
Thank you, Shareholder Representative Services.