Grant Thornton LLP, one of America’s largest audit, tax and advisory firms, released a new survey on mergers and acquisitions (M&A) disputes.
The 2023 M&A Dispute Survey revealed that dispute activity has increased — along with an increase in overall deal volume.
The survey polled 150 active deal participants on both the buy-side and sell-side of transactions and provided insights into the most significant and timely trends shaping the dealmaking environment. The research found that 42% of respondents believe the looming economic slowdown and inflation challenges will lead to more disputes.
While dealmaking activity has been robust — with more than 30,000 deals as of September 2023 — valuation gaps remain and there are clear indications that buyers have cash to make acquisitions and may simply be waiting for more favorable financing. Meanwhile, many sellers are holding out and awaiting higher valuations. These larger trends are impacting both negotiations and the specifics of deals.
Additionally, the survey found that of the total number of deals with post-close working capital adjustments, 36% were disputed. What’s more, of the total deals with post-close earn-out adjustments, 26% were disputed. While the percentage of disputed deals appears to have decreased, an overall rise in the number of deals means the absolute volume of disputes rose when compared to the previous survey. Additionally, those disputed deals were twice as likely to be referred to a neutral accountant — 11% versus 5% in the previous survey. This increase underscores the important role of the neutral accountant.
Grant Thornton M&A professionals said the first step in addressing disputes is identifying their potential cause, including vague language, purchase price adjustments, working capital calculations and earn-outs. Additionally, there are best practices that can reduce uncertainty and address ambiguities before they develop into issues, such as: greater clarity in the accounting language, providing an example, and evaluating earn-out timing, scheduling and metrics. Alternatively, mitigating post-closing dispute risk using a locked-box mechanism.
Grant Thornton leaders encourage companies to also consider clarifying the methodology. The more clarity achieved in the purchase agreement drafting, the more likely the deal will succeed. Financial due diligence can be a powerful ally. Yet, dealmakers on average reported that less than half (41%) of their deals involved an external financial due diligence provider.