- with Senior Company Executives, HR and Finance and Tax Executives
- with readers working within the Consumer Industries, Healthcare and Property industries
It is common for M&A buyers, and particularly private equity buyers, to price a deal based on a multiple of EBITDA (among other things). How, then, should damages be calculated if the seller is found to have breached representations that informed the buyer's financial assessments?
A recent Delaware ruling awarded damages to a buyer based on the EBITDA multiple the buyer used to set the purchase price. The decision is instructive on several levels, including as the court addressed the impact of the purchase agreement expressly defining "losses" to include damages "based on a multiple of earnings, revenue or other metric". The decision also comes amid representation and warranty insurance (RWI) data that indicates that the frequency of post-closing M&A claims in North America seeking damages on a multiple basis (as opposed to a dollar for dollar basis) is trending steadily upwards.
Claims For Damages on a Multiple Basis are Rising
A recent RWI claims study (the Study)1 reports that the frequency of RWI claims in North America seeking damages on a multiple basis (as opposed to a dollar for dollar basis) is steadily increasing. Whereas for RWI policies in North America incepted between 2016 to 2019, only 14% of RWI claims were for losses greater than dollar for dollar, for policies incepted between 2021 and 2024, 23% of claims were for losses greater than dollar for dollar.
Moreover, as the three year claim periods for policies incepted in policy years 2022, 2023 and 2024 have not yet ended, the Study anticipates that the 23% average for the years 2021 to 2024 could still climb higher. The Study also states that in a survey of RWI insurers, 41% of insurers "reported that claims alleging a multiple of damages are increasing and 0% reported a decrease." This trend is noteworthy on its own. It is also complimented by court rulings addressing when damages on a multiple basis may be appropriate in postclosing M&A disputes.
Damages for Transaction Multiples in M&A Disputes
In Dura Medic Holdings, Inc2 , the Delaware Court of Chancery examined a dispute that arose from a private equity firm's purchase of a medical equipment supplier. The buyer sought indemnification from the sellers for breaches of representations and warranties regarding the target's contracts.
The EBITDA Multiple and Definition of "Losses"
The transaction's purchase price was calculated using the target's EBITDA for a 12 month period. The purchase agreement provided that the buyer would be indemnified for "losses" resulting from breached representations and warranties, with "losses" defined to include "damages based on a multiple of earnings, revenue or other metric." That said, the agreement did not require a multiple-based calculation or address when a multiple should be used to calculate damages.
The breached representation provided that no significant customer had notified the target of an intent to reduce or terminate its business. This representation was incorrect with respect to two significant customers, and the buyer sought damages for the breach based on: the lost earnings from those two customers that would have been received over the 12 month period used to calculate the purchase price (being $433,322)3, multiplied by the EBITDA multiple the buyer used to calculate the purchase price (being 6.7797). The court awarded damages on this basis, namely $2,937,793.4
The EBIDTA Multiple and Damages Award
Although the definition of "losses" contemplated damages on a multiple basis, the agreement did not require that damages be calculated on a multiple basis or specify in what circumstances a multiple should be used. Consequently, the court looked to the common law to determine if calculating damages on a multiple basis was appropriate. The court explained:
Because the agreement is silent, the court must look to the common law. Under the common law, a party can recover reasonable expectation damages based on a multiple where the price was "established with a market approach using a multiple." That reasoning applies here. The Buyers proved that they derived the Merger price by applying a multiple of 6.7797 to the Company's EBITDA. The court will calculate damages using the same multiple.5
The court held that "[w]hether a misrepresentation diminishes the value of the business sufficiently to warrant applying a multiple turns on the extent to which the misrepresentation affects future earning periods."6 This was the case in the current circumstances because "the customer losses resulted in recurring declines in revenue."7 The court also cited numerous Delaware precedents endorsing the possibility of damages in M&A disputes based on a multiple.8 The court added that applying a multiple may be "particularly" appropriate "where the Merger Agreement contemplates multiple-based damages."9
Key Practical Takeaways
North American M&A deal point studies do not yet track whether the parties define "losses" to include damages based on a multiple as in Dura Medic. Given that RWI insurers are reporting a marked increase in RWI claims in North America alleging damages based on a multiple, and given the ruling in Dura Medic (and the precedent it relied on), this may be a valuable deal point in M&A studies gong forward.
A takeaway for North American M&A buyers is to consider negotiating for a reference to damages on a multiple basis in the definition of "losses".10 This will not assure a court takes this approach, but it may improve the likelihood. The buyer should also be prepared to provide evidence demonstrating the purchase price was calculated using a multiple and that the use of this method is in line with the corporation's value (e.g., deal modeling, investment committee memoranda, and/or expert witness testimony). Both buyers and sellers should appreciate that, even where an acquisition agreement is silent on the matter, a court could still be persuaded (depending on the circumstances) to award damages based on a multiple under common law principles.
Footnotes
1. See Aon, 2025 Transaction Solutions Global Claims Study (2025), available here (the Study). While the Study covers the North American, EMEA and APAC markets, the statistics cited in this Fasken article relate only to the North American market. Our reference to the Study does not constitute any endorsement of Aon relative to its competitors. Prospective purchasers of RWI are encouraged to consider all related policy and service providers.
2. In re Dura Medic Holdings, Inc., 2025 De. Ch. LEXIS 47 (Feb. 20, 2025) [Dura Medic].
3. The buyer calculated this figure at $478,701. However, the court agreed with the sellers' calculation of $433,322.
4. This was reduced to $2,847,890 for post-closing collections from the two customers totalling $89,903.
5. Dura Medic at *56.
6. Dura Medic at *57
7. Dura Medic at *57.
8. Dura Medic at *56 note 51 citing WaveDivision Holdings, LLC v. Millenium Digit. Media Sys., LLC, 2010 Del. Ch. LEXIS 194 at *23 ("For present purposes, I find it appropriate to use a multiple of EBITDA analysis to calculate the value of Systems to Wave. That is the technique upon which Wave based its expectations..."), Cobalt Operating, LLC v. James Crystal Enters., 2007 Del. Ch. LEXIS 108 at *29, aff'd 945 A.2d 594 (Del. 2008) (awarding damages based on a cash flow multiple where "Jim Hilliard knew Cobalt was relying on a cash flow multiple in reaching the price it was willing to pay for WRMF"), Swipe Acquisition Corp. v Krauss, 2020 Del. Ch. LEXIS 276 at *7 (("[I]t is reasonably conceivable that an EBITDA multiple could support a damages calculation. Plaintiff alleges that the parties discussed using an EBITDA multiple to calculate the purchase price and that the Buyers, in fact, did so."), and Taylor Precision Prods. V. Larimer Gp., Inc. 2023 U.S. Dist. LEXIS 184565 at *5 (Plaintiff has isolated the effects of the breach by calculating the TTM adjusted EBITDA ($593,670.00) of the lost SKUs and subtracting that from the TTM EBITDA and applying the purchase price multiple of 7.55x, which itself is derived from the original purchase price of $69.5 million.).
9. Dura Medic at *58.
10. When a transaction involves RWI, negotiation strategy regarding all contractual terms directly relating to post-closing liability should be discussed with the party's related advisors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
