M&A Science How to Bridge Valuation Gaps in M&A
Feb 14, 2024
John Blair, a Partner M&A Attorney at K&L Gates, specializes in guiding complex commercial transactions. He dives into the common issue of valuation disagreements in M&A and shares strategies to bridge those gaps, including earnouts and seller financing. John highlights the importance of detailed agreements and early legal involvement to prevent disputes. He also discusses the impact of current economic conditions on buyer-seller dynamics, offering insights into effective negotiation tactics and the significance of clear communication.
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Causes of Valuation Gaps Today
- Valuation gaps in M&A often arise from mismatched valuation expectations between buyers and sellers.
- Rising interest rates and a more cautious capital market environment exacerbate these valuation mismatches.
Earnout Negotiation Essentials
- Ensure earnout terms are clear, particularly about payment, timeframe, and milestones.
- Define dispute resolution mechanisms to prevent protracted disagreements post-closing.
Typical Earnout Structures
- Limit earnout payments to about 25-33% of the enterprise value and keep the measurement period mostly one to two years.
- Longer earnouts are suitable for milestone-based events, especially in healthcare.