For current and prospective business owners considering a sale and professionals navigating the private M&A landscape, keeping a finger on the pulse of “market terms” is critical to successfully structuring, negotiating, and executing transactions. The Market Trends Subcommittee of the American Bar Association Business Law Section (the “ABA”) recently released its 2025 Private Target Mergers & Acquisitions Deal Points Study (the “2025 Study”), providing a comprehensive look at deal terms in private transactions executed or completed in 2024 and the first quarter of 2025.
The 2025 Study analyzes 139 acquisition agreements and reveals several shifting trends that signal a market where insurance is dominant, the use of earnouts is shrinking, and sellers are successfully negotiating for greater certainty and limited liability.
Here are five key updates from the 2025 Study that every private M&A deal professional should know.
- RWI Has Become the Default for Private Deals
Perhaps the most significant trend is the continued surge in Representations and Warranties Insurance (“RWI”). The 2025 Study reports that 63% of deals now incorporate RWI, a step up from 55% in the 2022-23 study, and a substantial leap from 29% in the 2016-17 study. The continued proliferation of RWI coincides with increases in buyers’ covenants to both maintain (that is, not amend or cancel) RWI policies post-closing and to rely on RWI (along with any indemnity escrow) as the sole source of recovery for indemnity claims.
For sellers, this is largely good news, as RWI shifts the risk of unknown liabilities from the seller to an insurer. Consequently, we are seeing indemnity caps (the maximum amount a seller pays for breaches of representations) plummet. The 2025 Study shows the median indemnity cap for deals with RWI is just 0.25% of the transaction value, typically representing the deductible required under most RWI policies, compared to traditional caps which ranged from 8% to 12% in non-insured deals in the last decade. While RWI deals bring along increased costs and often involve a higher level of diligence with insurers, the prospect of reducing exposure and increasing certainty of take-home proceeds continues to be very attractive for sellers.
- Earnouts “On the Outs”
Earnouts, or deferred purchase price arrangements where the ultimate amount of the purchase price depends on the performance of the acquired business post-closing, have historically been a valuable deal tool to bridge valuation gaps, incentivize sellers to avoid interference with the post-closing operations of the business, and provide buyers with a higher degree of comfort regarding the business they are acquiring. The ABA’s 2008 and 2010 studies reported the highest proportion of earnout deals since 2006, at 29% and 38%, respectively, with a small but noteworthy resurgence to 26% in the 2022-23 study.
The 2025 Study suggests that, unlike deals featuring RWI, the market may be souring on earnouts as a deal mechanism, reporting the lowest proportion of earnout deals since 2006, appearing in only 18% of transactions reviewed. A notable finding in the 2025 Study sheds some light on the reason for this trend. The 2025 Study finds that in only 14% of deals does the buyer agree to run the business consistent with past practice during the relevant earnout period, and in only 5% of deals does the buyer agree to run the business so as to maximize the earnout. In practice, when buyers agree to utilize earnouts as part of deals, they uniformly resist covenants restricting their freedom to operate, and make changes to, the acquired business.
Our firm’s experience suggests that, in negotiating earnouts, sellers tend to view the potential earnout proceeds as “found money” that is not reliable and not considered to be a substantial driver of their economic return. This impression is driven home in the negotiations regarding applicable earnout covenants, where it becomes apparent that the buyer will reject covenants intended to comfort the seller and increase the likelihood that the conditions to an earnout are met. Deal professionals have also become increasingly aware of the potential for disputes related to earnouts, whether stemming from disputes regarding the buyer’s post-closing operation of the business or regarding more technical calculations related to earnout criteria. In our view, this trend of buyer autonomy in operating acquired businesses subject to earnout payments, combined with the information asymmetry associated with those operations, has eroded sellers’ interest in looking to earnouts as a reliable tool to enhance deal value.
- The “Fraud” Carve-Out is Getting Tighter
As deal professionals know, the scope of a buyer’s indemnity rights is one of the most heavily negotiated concepts in a private M&A transaction. Indemnity provisions in private M&A agreements commonly limit or cap the seller’s exposure to indemnity claims at a set dollar amount or percentage of deal value, and deal attorneys have historically included a simple carveout which excludes “fraud” or “fraud and intentional misrepresentation” claims from that limit or cap, though without specifically defining “fraud”. Because sellers rely on indemnity caps and other contract devices to preserve deal value and reduce risk associated with a transaction, sellers are incentivized to ensure that there is no ambiguity in the “fraud” exceptions to their liability caps and that there is a known, predictable scope of their indemnification obligations.
The 2025 Study shows that only 11% of deals now leave fraud undefined, which was the majority approach as recently as the ABA’s 2016-17 study. While the 2025 Study finds that 85% of acquisition agreements still include a specific carveout for fraud, the surge in clarity and specificity around those fraud carveouts has resulted in a major win for sellers, as 70% of those agreements expressly limit the fraud carve-out to fraud resulting from the representations made in the acquisition agreement itself (up from 52% in the previous study).
Further, the 2025 Study finds that 81% of deals include express non-reliance provisions, which seek to ensure that buyers do not bring indemnity claims for representations made outside of the acquisition agreement. Of all deals that included express non-reliance provisions, only about 26% carved fraud out of the non-reliance provision. The new majority approach of excluding a fraud carveout from the non-reliance provision protects sellers from claims based on casual email exchanges or management presentations that weren’t intended to be binding warranties. In our experience, this evolution in deal terms is not limited to larger middle market deals and can be seen in lower middle market deals as well.
- Purchase Price Adjustments Remain Ubiquitous and Separate Escrows are on the Rise
If you are selling your business, expect the final price to be calculated based on the precise financial picture of the business at closing, and for that picture to be painted after the closing occurs. The 2025 Study found that 90% of deals included a post-closing purchase price adjustment mechanism that typically takes into account working capital, debt, transaction expenses, and cash on hand, down slightly from 92% in the prior study.
Interestingly, while these adjustments are standard, the mechanism for securing them is changing. A majority (58%) of deals now require a separate escrow for these adjustments, as opposed to the earlier majority approach of relying on the general indemnity escrow or simply a contractual promise to pay. This provides buyers with greater certainty that funds will be recoverable, but also reduces cash flow at closing for sellers, who will have more of their proceeds locked away in multiple escrow accounts.
- The “Sound of Silence” on Sandbagging
“Sandbagging” occurs when a buyer closes a deal knowing the seller has breached a representation in the acquisition agreement, and then sues for indemnity after closing. Buyers argue they purchased a specific promise and should be paid if it’s broken, regardless of their knowledge. Sellers argue it is unfair to “sandbag” them with a known issue.
The market solution appears to be silence. The study found that 68% of acquisition agreements remained silent on the issue of sandbagging. While this is a notable step down from 76% in the prior study (the difference correlating with an increase in pro-sandbagging language in the 2025 Study), it remains consistent with a longer trend of increasing silence on sandbagging language, which ranged between 49% and 59% between the 2008 and 2018-19 studies. While buyers and sellers often omit pro- or anti-sandbagging language to avoid a contentious fight over the optics of the provision, doing so means relying upon the default approach taken under applicable law, and state laws vary significantly on this issue. For example, under Delaware law, silence generally defaults to a “pro-sandbagging” position favoring the buyer, while California law generally imposes an “anti-sandbagging” approach that favors sellers. North Carolina courts have not considered the issue under North Carolina law, so choosing not to address sandbagging in an acquisition agreement governed by North Carolina can be a gamble for both parties.
Conclusion
The 2025 ABA Study paints a picture of a sophisticated market for private M&A transactions. The widespread adoption of RWI has streamlined indemnity negotiations, allowing parties to focus on other value drivers. By contrast, sellers are becoming less interested in earnouts as a potential source of deal value. Sellers are finding success in limiting their long-term exposure through tighter fraud definitions, buyers continue to secure robust price adjustment mechanisms, and both parties are agreeing to leave sandbagging unaddressed.
For business owners and private M&A deal professionals, these trends underscore the importance of having experienced, sophisticated M&A counsel. Market terms are constantly evolving, and working with deal professionals that know what is standard in today’s M&A market can dramatically impact the deal negotiation process and lead to better, more efficient outcomes from all parties in a transaction.
Disclaimer: This post is for informational purposes only and does not constitute legal advice. M&A trends vary by deal size, industry, and structure.
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