Mergers and Acquisitions (M&A) transactions are often seen as the culmination of extensive planning, negotiation, and due diligence. However, the post-closing phase can bring unexpected disputes that may jeopardize the value of the deal and relationships between parties. Business leaders must be prepared to address these challenges effectively to protect their interests and ensure long-term success.
Understanding Post-Closing Disputes
Post-closing disputes commonly arise from:
- Purchase Price Adjustments – Disagreements over working capital, net debt, or EBITDA targets.
- Earnout Provisions – Contingent payments based on post-closing performance.
- Breach of Representations and Warranties – Claims that disclosed information was inaccurate or incomplete.
- Indemnification Claims – Buyer or seller disputes regarding the reimbursement of losses.
Key Lessons for Business Leaders
- Prioritize Precision in Contract Drafting
The best way to avoid post-closing disputes is to ensure airtight agreements. Clearly define terms like working capital adjustments, material breaches, and earnout milestones. Vague provisions often become flashpoints for litigation. - Focus on Due Diligence
Comprehensive due diligence reduces the risk of surprises after the deal closes. Understanding both the legal and operational aspects of the business minimizes future claims regarding undisclosed liabilities or misrepresented performance. - Leverage Dispute Resolution Mechanisms
Incorporate robust dispute resolution clauses in the agreement, including:- Mediation/Arbitration: Faster and more cost-effective than court litigation.
- Expert Determination: Using neutral accountants or valuation experts for specific financial disputes.
- Post-Closing Integration is Critical
Aligning the management, financial systems, and cultural aspects of two companies post-closing minimizes misunderstandings and operational conflicts. - Be Prepared for Earnout Complexity
Earnouts are inherently risky due to subjective performance metrics. Structure earnout provisions with clear, achievable targets and dispute-resolution mechanisms to mitigate disagreements.
Real-World Insight: A Case Study
Consider a recent scenario where a buyer and seller disagreed on post-closing EBITDA calculations. The lack of clarity in defining certain cost allocations led to a $10M dispute. The matter was ultimately resolved through arbitration, but only after significant expense and disruption. This case underscores the importance of defining financial metrics precisely in the agreement.
Conclusion
For business leaders, navigating post-closing disputes requires foresight, preparation, and strategic negotiation during the deal phase. By prioritizing precision, due diligence, and resolution mechanisms, organizations can mitigate risk and safeguard the value of their transactions.
Call to Action
At Diamond Strategy Partners PLC, we specialize in helping businesses navigate complex M&A transactions and post-closing disputes. Contact us to ensure your deal is secure from start to finish.
Respectfully,
Michael J. Sulaka
Managing Partner
Diamond Strategy Partners PLC