Due to strict regulations, expensive capital, and uncertainties brought on by pandemics, the mergers and acquisitions (M&A) strategy that finance leaders once favored is currently experiencing difficulties. A recent survey by Grant Thornton sheds light on the challenges encountered by CFOs, whether they are buyers or sellers, in the current M&A landscape.
The survey, comprising 189 US-based M&A professionals, reveals a notable increase in accounting disputes affecting deals. Nearly half of the respondents, including private equity investors, corporate development officers, and legal counsel, reported disputes in their deals, with 47% involving earn-out disputes and 46% grappling with working capital disputes. While the number of deals has risen, the surge in disputes has introduced complexities for both buyers and sellers, placing CFOs in pivotal roles.
The data illustrates a consistent pattern in dispute resolutions. Among working capital disputes, 30% were settled before a formal dispute or objection notice, with an additional 10% resolved through good-faith negotiations. In contrast, earn-out disputes showed more rigidity, with 38% resolved before a formal dispute and only 6% remedied through negotiations.
Language clarity emerged as a critical factor in dispute prevention. CFOs, increasingly playing roles as communicators, are instrumental in ensuring precise details to avoid confusion during negotiations or closing. Half of the respondents addressed vague language by employing an accounting hierarchy or specific accounting policies, while 44% utilized specific accounting policies more frequently during the M&A process.
The survey highlighted the persistent issue of imprecise language surrounding working capital and earn-out calculations, emphasizing the need to bridge gaps in Generally Accepted Accounting Principles (GAAP) and clarify language. Notably, 23% of respondents relied consistently on GAAP.
Effective communication on elements impacting the deal post-closing is crucial. For working capital adjustments, 42% of respondents set a deadline for assessing adjustments, while 23% adopted another hard cut-off date, and 15% extended until the deal's closing date. In deals based on earn-outs, opinions differed on the best metric for determining value, with 34% favoring EBITDA, 22% relying on gross revenue, and 21% opting for a combination of both.
In navigating the challenges of M&A disputes, CFOs find themselves at the forefront, emphasizing the importance of clarity in language, precision in accounting practices, and effective communication strategies to ensure successful deal outcomes in a challenging landscape.
