Bill Wiersema, M&A expert, shares valuable advice on avoiding post-closing disputes in M&A deals. Topics include common areas of dispute, the importance of expert advisors, working capital adjustments, earnouts, due diligence, and the role of financial experts in preventing conflicts.
Deals should define debt and working capital clearly to avoid post-closing disputes.
Clear guidelines in purchase agreements are crucial to prevent working capital disagreements.
Simplified earnout terms and aligned goals can minimize post-acquisition financial conflicts.
Deep dives
Working Capital Disputes and Debt-like Items
Deals closing often lead to potential disputes, especially concerning the definition of debt and working capital. Businesses are typically sold as cash-free and debt-free, requiring sellers to pay off debts while retaining cash proceeds. Disagreements may arise regarding defining debt-free transactions, leading to contentious issues around bank debts and other financial obligations. Working capital disputes are common due to differences in pre and post-closing calculations, such as receivables, inventory, and payables, impacting post-sale funding and viability.
Challenges with Working Capital and Avoiding Disputes
Working capital disagreements stem from variations in initial estimates and actual post-closing financial statuses. Sellers sometimes strategically manage working capital components to their advantage, affecting buyer's ability to run the business seamlessly post-acquisition. To prevent disputes, clear guidelines in purchase agreements are essential, addressing reserve methodologies, peg targets, and accounting practices. Understanding how working capital movements influence post-closing operations is crucial to fostering a favorable buyer-seller relationship.
Complexities of Earnouts and Risk Mitigation
Earnouts introduce complexities in deal negotiations, often leading to post-acquisition financial disputes. Variability in factors such as EBITDA metrics, sales targets, and operational strategies can impact earnout payouts. Manipulation by buyers or sellers to influence earnout results necessitates clear, concise metrics and straightforward payout structures to mitigate conflicts. Simplifying earnout terms and aligning goals with operational realities can help minimize misunderstandings and foster transparent post-sale arrangements.
Key Point 1: Importance of Detailed Purchase Agreements in M&A Deals
Detailed purchase agreements in M&A deals play a crucial role in bridging valuation gaps between buyers and sellers. Codifying accounting policies, using templates, and specifying accounting basis conversions are essential aspects. Addressing non-operating items like government subsidies and outlining earnout treatment is vital. Properly drafted agreements can prevent disputes, especially regarding post-closing adjustments, inventory discrepancies, and earnouts.
Key Point 2: Significance of Sell-Side Due Diligence in M&A Transactions
Sell-side due diligence is an investment that can result in a higher sale price and smoother deal process. By proactively addressing potential issues and optimizing their presentation, sellers can avoid contentious post-closing disputes. The due diligence process helps in uncovering and resolving critical financial matters, ensuring a harmonious transition for both parties post-closing. Engaging experienced professionals early on can provide leverage, improve deal outcomes, and safeguard long-term business relationships.
M&A disputes post-closing are more common than people realize. Disputes arise from different sources for different reasons and can result in hundreds of thousands of dollars in litigation costs. Bill Wiersema returns to M&A Talk to offer expert advice on how to best prepare during the sales process to avoid potential disputes after the closing. He discusses the three most common areas of dispute and the value of having expert advisors to navigate financial due diligence to prevent issues from arising.