Evening Brief – 12.13.23
M&A Dispute Activity on the Rise
While dealmaking activity has been vigorous, with over 30,000 transactions completed as of September 2023, valuation discrepancies persist, and there is obvious evidence that buyers have cash to pursue deals and may simply be waiting for more favorable financing. Meanwhile, many sellers are holding out for better prices.
These larger trends are impacting both negotiations and the specifics of deals, according to a survey on mergers & acquisitions (M&A) disputes conducted by Grant Thornton LLP, an audit, tax and advisory firm.
The 2023 M&A Dispute Survey revealed that in tandem with the increase in overall deal volume dispute activity has increased.
The survey interviewed 150 active deal participants on both the buy-side and sell-side of deals, providing insights into the most important and relevant trends affecting the dealmaking landscape.
The research revealed that 42% of respondents believe the possibility of an economic slowdown, or even recession, and challenges in continuing to bring down inflation, will lead to more disputes.
Furthermore, 36% of the total number of acquisitions with post-closing working capital adjustments were contested, and 26% of all deals with post-closing earn-out adjustments were disputed.
While the percentage of contested deals appears to have decreased, an increase in the overall number of deals indicates that the absolute number of disputes has increased when compared to the prior study.
Those contested transactions were twice as likely to be referred to a neutral accountant – 11% compared to 5% in the prior poll. This growth emphasizes the critical importance of the unbiased accountant.
According to Grant Thornton M&A professionals, identifying the potential reason for a conflict, such as ambiguous language, purchase price modifications, working capital calculations, and earn-outs, is the first step in resolving it.
Furthermore, there are best practices that can reduce ambiguity and address them before they become problems, such as better clarity in accounting language, presenting an example, and analyzing earn-out timing, scheduling, and metrics. Alternatively, a locked-box technique can be used to mitigate post-closing dispute concerns.
Grant Thornton advises businesses to consider defining their process as well. The more clarity achieved in the design of the purchase agreement, the more likely the sale will succeed.
Due diligence in financial matters can be a great ally. Nonetheless, dealmakers claimed that less than half (41%) of their transactions involved an external financial due diligence source.