Aside from accepting lower prices, entrepreneurs trying to sell a business are struggling with increasingly unfavourable terms, according to the European M&A Survey 2009, conducted by London-based law firm CMS Cameron McKenna. 

Aside from accepting lower prices, entrepreneurs trying to sell a business are struggling with increasingly unfavourable terms, according to the European M&A Survey 2009, conducted by London-based law firm CMS Cameron McKenna.

The survey is based on data compiled from 494 M&A agreements completed in Europe between 2007 and 2008.

After years of high prices and high demand, sellers are being forced to eat some humble pie. The survey reveals that contractual clauses that favour buyers are becoming more prevalent.

Martin Mendelssohn, a corporate partner at CMS Cameron McKenna, said: “It’s a buyer’s market and buyers are now able to get more protection for their investment.
We are seeing more earn-out provisions in contracts in which buyers withhold some of the purchase price, on the basis that they will pay more if the company performs well under their ownership.”

Another common contractual protection is the use of a ‘material adverse change’ clause (MAC), whereby a change in fortunes of the target business allows the buyer to rescind the contract after the deal has been completed.

Sellers are also more likely to be liable for past offences as sellers’ liability caps are increased, and for longer periods, as warranty periods are extended.

Mendelssohn added: “Any shift in risk allocation is usually going to be relatively small because customs and practice take a long time to develop and they don’t change overnight, so to have such clear evidence of a shift is pretty significant.”