What's an Average Expense Fund?

SRS always recommends including an expense fund in a merger in case it becomes necessary to defend against a claim on an escrow or holdback. The next logical question is, how big should the expense fund be? We looked at our data and found that 2 out of 3 deals had an expense fund. Of the deals that had expense funds, the average ended up at over $268k, but the median was slightly lower at $225k, and the mode was $50k. Expense funds in general ranged greatly from $50,000 (the minimum SRS recommends) to $1M. As a percentage of the selling price, the average expense fund was just over a half of a percent. The percent set aside for expense funds ranged from .11% to almost 3% based on the circumstances (and to some degree the size) of the deal.

There is no clearly correct answer on how large an expense fund should be for any given deal. However, it should be sufficient to meet the expenses the parties reasonably anticipate will arise following closing in order to gain all of the benefits of setting up the fund in the first place without being so large that it unnecessarily ties up too much of the merger proceeds. This is really an exercise in modeling out what kinds of claims could be reasonably anticipated and what size budget would be necessary to fight such claims. We’d be happy to provide thoughts or feedback on this if it would be helpful.