Most M&A negotiations fixate on enterprise value, multiple expansion and the headline price, and for an understandable reason: price is the part everyone can read. But in private-company and carve-out deals, a good share of the economic outcome is decided after the price is agreed: in the indemnity architecture, the completion mechanics, the escrow design and the earn-out formula. Lawyers draft those clauses, but corporates and their advisers need to negotiate them with the same rigour they bring to EBITDA adjustments.
Representations and warranties survive for a set period; indemnities are what give them teeth. Data from the ABA Private Target M&A Deal Points Studies and various practitioner surveys points to fairly stable conventions: liability caps often around 10-15% of purchase price in mid-market corporate deals, and higher in smaller transactions, and deductible baskets frequently in the 0.5-1.0% range as a tipping basket. “Market”, though, is only a starting point. The right cap depends on what diligence turned up, the seller’s credit, and whether Representations and Warranties Insurance (RWI) is in the picture.
A locked box fixes equity value at a historical balance-sheet date, and the seller carries leakage risk through to closing. Completion accounts do the opposite: they adjust the price after closing for working capital, debt and cash, which pushes the dispute risk into the adjustment period. Sellers usually like the certainty of a locked box; buyers tend to prefer accounts where there is seasonality or fast-moving working capital. The choice feeds into more than the accounting. It also shapes the interim covenants and how management behaves between signing and close.
Earn-outs exist to bridge a valuation gap when buyer and seller genuinely disagree about future performance. Kroll and other dispute specialists keep reporting them as one of the most common sources of post-closing conflict, and the reasons are predictable: vague metrics, arguments over EBITDA normalisation, and accounting-policy changes between signing and the measurement date.
Escrow holdbacks, typically 5-15% of price held for 12-24 months, are still a practical way to secure indemnity claims without leaning on drawn-out seller guarantees. There is a trade here too: a buyer can swap escrow size against cap size, since a bigger holdback can justify a lower cap on credit grounds. In one divestiture I ran, to an Asian strategic buyer, that escrow-for-cap trade mattered more than the final increment on the price itself. And warranty & indemnity insurance premiums, often around 1-1.5% of the limit, belong in the sources and uses as a financing cost, not an afterthought.
Before the first SPA draft goes round, I build a “value map”: headline price, expected indemnity leakage on a probability-weighted basis, the funding cost of escrow, the expected value of the earn-out, and the likely range on completion-account variance. That map tells you which clauses are worth fighting over. A 50 bps move on the cap might matter far less than a specific indemnity for a known tax exposure, and sometimes more than a 2% bump in price. It depends entirely on the map.
What is being negotiated, underneath the single headline number, is the allocation of risk between two parties who then have to live with the contract for years. The advisers who are good at this treat the SPA and SHA schedules as economic documents, and give them the attention the price gets by default.