How do you determine escrow amount & value consulting agreement in offers?

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August 08, 2019

by a searcher from IESE Business School in Los Angeles, CA, USA

I'm interesting in hearing how you go about deciding how much to set aside in escrow for working capital and how to value the consulting agreement when you make an offer? I have separate line items for both of these in my IOI, and am curious to hear if you list these in your IOIs/LOIs as well? And if you do, do you have the same percentage figure for escrow and the same dollar amount for the consulting agreement independent of industry? I realize these are figures up for negotiation later in the process, but would suspect there should be some industry differences that may make certain offers more or less appealing. Thank you for sharing your insight on this!

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Reply by a searcher
from London School of Economics and Political Science, University of London in San Francisco, CA, USA
Hi Max, I would agree that a 10-20% escrow for purchase prices adjustments for working capital is about right, this assumes that any adjustment would be $ for $ and that there are no minimum values to the adjustment which are to disregard. If having an escrow is a deal-breaker then putting it in the LOI would be normal in my opinion. You can always leave the wording vague to say something like " the working capital adjustment will be subject to customary escrow mechanics", which allows you the flexibility to negotiate the percentage further down the line, but reserves the position that an escrow is expected. Hope that helps.
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Reply by a searcher
from The University of Auckland in Los Angeles, CA, USA
Not sure this helps but for working cap I followed Ruback & Yudkoff's advice per the book and put this in the LOI (as it's often a late-stage deal-breaker I wanted it up front) - used their formula: working cap = receivables + inventory - payables. In terms of holdback escrow, the median amount is 9% for 18 months and about a quarter had a claim - more info here if you still need it -http://www.carr-mcclellan.com/holdback-escrows-in-ma-transactions/
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