The 2020s have been a turbulent decade for the global M&A market. After a spectacular rebound in 2021, the deals landscape has been plagued by uncertainty as markets grapple with macroeconomic pressures, recessionary fears and geopolitical upheaval.

Whereas many observers initially expected a flurry of activity in 2024 led by an uptick in global markets, economic recovery was slower than expected, with certain economies experiencing stubbornly high inflation and disappointing growth. As such, last year was one of cautious recovery; whilst deal values held steady (or even increased slightly) due to major transactions in sectors like technology and energy, the total volume of deals remained lower than in prior years, reflecting cautious sentiment among dealmakers. Nevertheless, the outlook for 2025 remains positive, driven by expected reductions in interest rates, regulatory loosening and record levels of dry powder at private equity firms.

With dealmaking activity expected to accelerate, buyers and sellers alike must remain vigilant to the risk of post-M&A disputes, which often lead to lengthy and costly legal proceedings. The risk of disputes is particularly acute where the parties adopt a completion accounts mechanism in the sale and purchase agreement (SPA) governing the transaction. The inclusion of such a mechanism provides for post-closing purchase price adjustments on the basis of completion accounts prepared by one or other of the parties. This means that the final price is not determined until after the legal transfer of ownership of a business. Although completion accounts tend to give greater protection to buyers, the process is more resource-intensive, with a greater potential for disagreements after the transaction is completed.

Alternatively, the parties may agree upon a “locked box” mechanism, where the purchase price is fixed as at the SPA signing date, usually on the basis of agreed-upon historical financial statements. The fixed price nature of the locked box can reduce the risk of contention between the parties. Indeed, a prior study conducted by Accuracy found that fewer than 20% of the post-M&A disputes we had worked on used a locked box completion method. The locked box can be a particularly efficient way to prevent disagreements where the value of the target is prone to change significantly between signing and closing; for instance, if underlying market volatility leads to unexpected fluctuations in bond yields, which in turn could have a significant short-term impact on the value of long-term liabilities such as pension obligations. However, although the locked box mechanism may reduce the risk of disputes, it may also mean that the agreed price may not accurately reflect the value of the business at the date upon which ownership is transferred to the buyer. Therefore, many buyers prefer the additional assurances afforded by the completion accounts process.

At Accuracy, our cross-functional teams combine experienced transactions practitioners with seasoned disputes experts, making us uniquely placed to provide solutions to our clients’ demands across the whole M&A process. Our experience of the issues that can lead to post‑M&A disputes, and how these can be avoided, enables us to advise our clients on how to minimise the risk of disputes during the negotiation process and prior to signing of the SPA.

In this article, we consider some of the most common circumstances that give rise to post-M&A disputes and explore how the risk of disputes can be minimised throughout the M&A process.

 

1. Tighten up your SPA terms (ambiguity is your enemy)

 

Often, disputes arise simply as a result of loose wording in the SPA, which may be interpreted differently by the parties.

More specifically, under a completion accounts mechanism, disputes can arise where a hierarchy of accounting policies applicable for the preparation of the completion accounts is not clearly defined. In one of Accuracy’s recent arbitration cases, the SPA was not clear as to whether specific accounting policies set out in the SPA, which were consistent with IFRS, should take precedence over historical accounting practice. The seller prepared completion accounts in line with historical accounting practice, which resulted in a treatment of intercompany liabilities that was inconsistent with IFRS. The buyer’s position, which we agreed with, was that the specific accounting policies should take precedence over past practice and that, in any case, IFRS compliance was required by the SPA, as the parties’ intention was not for the application of past practice to perpetuate errors.

Disputes may also arise where accounting policies themselves (or the methodology for applying them) are ambiguous, inconsistent or missing, meaning that the party preparing the completion accounts must exercise judgement or provide estimates based on its own interpretation. In another of our cases, the base purchase price was calculated based on a multiple of FY22 profits. The buyers, who prepared the completion accounts, disagreed with some aspects of year-end revenue recognition and moved some of FY22’s earnings to FY23, but did not apply the same procedures at FY22 opening (which would have resulted in a similar movement of earnings at the end of FY21 to FY22). The buyer’s position effectively recognised only a partial FY22 financial result, thereby artificially depressing profits and resulting in a lower valuation, which was disputed by the seller. In the ensuing arbitration, the buyer argued that, since the seller had warranted that the FY21 accounts were accurate, it was not possible to make an adjustment that would impact FY21 results. Conversely, we opined that earnings should be recognised consistently over the full FY22 reporting period in accordance with local GAAP, and that the accounting policies did not prohibit – and in fact mandated – the correction of prior period errors. We noted that it was not economically rational to apply a closing cut-off adjustment without applying an opening adjustment, as this would distort the true performance of the business that was being acquired and result in a windfall for the buyer. We also questioned whether the historical revenue recognition, applied in FY21 and previous years, was in fact erroneous, noting that these accounts had been signed off by the seller’s auditors. In this instance, specifying in the SPA the revenue recognition policies to be applied in preparing the completion accounts could have avoided a subsequent dispute.

Finally, disputes often arise where purchase price adjustments for debt, cash and working capital are not comprehensively defined in the SPA. This may result in a disagreement as to how certain items should be quantified for the purposes of the completion accounts or whether such items are within the scope of the purchase price calculation in the first place. In one such case, where Accuracy were acting for a potential buyer, a material new provision was recorded by the seller between signing and closing. The seller’s position was that this had no impact on the purchase price as it was not provided for in the SPA whilst, naturally, the buyer argued that the price should be reduced commensurately.

To mitigate these risks, it is key that lawyers and financial advisors co-operate closely when drafting SPA clauses to ensure that the purchase price adjustment mechanism and the completion accounts preparation process, including the accounting hierarchy, is adequately defined. To the extent possible, accounting policies and procedures should be prescriptive, minimising the use of judgement or estimates by the parties and avoiding woolly or ambiguous wording (e.g. “reasonable efforts”, “best judgement”, “to the extent possible”).

In addition, it is often helpful to include examples in (or as an annex to) the SPA, such as pro forma account mapping, illustrative calculations of how certain assets and liabilities should be valued, or guidance as to how any new accounts are to be treated.

 

2. Use due diligence as a first line of defence

 

The second issue we are frequently confronted with in our post-M&A dispute practice is that findings from the due diligence process are not fully reflected in the SPA and, therefore, fail to provide sufficient protections for the buyer.

For example, if risks surrounding the recoverability of receivables are identified during the financial due diligence, but no protection against this risk is included in the SPA (e.g. in the form of a specific indemnity), the buyer may have no legal recourse should the value of receivables be impaired or written off post-transaction. Furthermore, if the financial due diligence findings are overlooked, reference values for EBITDA, net debt or working capital requirements as used in the purchase price calculation may be inappropriate and the buyer may find that they are not getting what they paid for.

Again, it is therefore essential that financial advisors are consulted in order to provide input to the SPA and ensure that key financial considerations and risks identified during the due diligence process are adequately reflected.

In addition, where there are multiple due diligence streams operating simultaneously (for example, tax, legal or technological due diligence), it is crucial that the respective teams communicate efficiently with each other to ensure that there is no information lost at the intersection of disciplines during the transaction. For example, the buyer will want to seek protection for any potential future litigation costs identified through the legal due diligence and ensure that all existing and potential tax liabilities are reflected in the purchase price.

It may also be worth including individuals with disputes experience in the due diligence team, as they are well-positioned to identify issues that may lead to disputes post-closing and should be specifically addressed in the SPA.

 

3. Financial integrity: get the skeletons out of the closet early

 

A further common cause of disputes may arise where there are issues surrounding the reliability of financial data provided by the seller, either in (i) the financial information provided during the due diligence process, upon which the buyer based its valuation; or (ii) the data underlying completion accounts themselves.

In certain cases, this may be involuntary, for example if the seller has inadvertently made errors in its unaudited financial information or lacks expertise in preparing completion accounts. Particularly in small businesses, there may be a weak controls framework or a lack of available human resource which results in errors and/or incomplete or outdated financial information. Alternatively, where the seller and buyer use different accounting standards or policies (e.g. IFRS v GAAP, or different revenue recognition criteria) this may create some uncertainty as to the true financial health of the target.

The buyer should be wary of the seller applying aggressive accounting approaches (e.g. to maximise EBITDA under a multiples-based valuation) or producing over-optimistic forecasts in order to enhance the value they receive during price negotiations. In more extreme cases, a seller may deliberately manipulate or even falsify its accounting records, for instance by distorting underlying financial performance through transactions with related parties, or by omitting material liabilities. For example, in a case that Accuracy was involved in previously, our client had acquired a digital marketing agency. Post-closing, it transpired that the seller had improperly recognised revenues and artificially inflated earnings in its accounting records to present the target in a falsely positive light.

Where a seller is found to have acted fraudulently in M&A negotiations, the buyer may seek to pursue either civil or criminal (e.g. under the Economic Crime and Corporate Transparency Act 2023, which will come into full force on 1 September 2025) proceedings and the seller may be subject to fines and penalties from regulatory bodies, for example if its actions are deemed to violate securities law.

In order to minimise its exposure, the buyer should seek to identify potential risk areas at the earliest stage, for example where the purchase price mechanism may be subject to manipulation or where future volatility could distort value and/or cause a breach of warranty, to ensure these matters are adequately reflected in negotiations.

A thorough due diligence of the target is also essential to identify any accounting errors or nefarious conduct by the seller. Where a seller is acting dishonestly, they may seek to obscure their behaviour by making their accounts complicated to understand. Good due diligence can cut through this complexity and unearth any “skeletons in the closet” that may otherwise go undiscovered until after the transaction is complete.

Any remaining risk should be mitigated as far as possible through the use of comprehensive warranties and indemnities in the SPA, alongside clear guidance regarding the preparation of completion accounts or other financial data. It is crucial that the accounting warranties included in the SPA are adequately specific, in particular where the target’s accounts are unaudited.

 

4. Navigate complexity with simplicity

 

Certain SPAs may include more complex price adjustment mechanisms which provide future, and sometimes contingent, rights to the parties.

For example, an earnout clause is a contractual agreement under which a seller will receive additional compensation post-transaction if the business meets certain targets (for example, if it achieves an EBITDA in excess of a target). Earnouts have grown to become a common feature of M&A transactions, with market studies showing that roughly a third of M&A deals in 2023       included a form of earnout.¹ SPAs may also include put or call options, which either give a seller an option to sell shares, or a buyer the option to purchase shares, at a later date for a pre-determined price. Such mechanisms can be used to safeguard the interests of both parties and help bridge the valuation gap where the views of the buyer and seller are not aligned.

However, given the relative complexity of these mechanisms, they can often give rise to tensions between the parties, in particular where they do not interact cleanly with the other provisions of the SPA.

Perhaps given that there may be a significant time lapse between completion and the date at which the relevant adjustments are applied, we often find that insufficient consideration is given to such mechanisms in the SPA. For example, while SPAs often contain detailed guidance and accounting policies governing the preparation of completion accounts, guidance as to the calculation of a seller earnout is limited. When such clarity is missing, disputes can arise.

Therefore, the parties should anticipate during the negotiating phase how these complex situations can be navigated, including how matters such as synergies, business integration and buyer-implemented cost controls might impact the performance of the business post-acquisition and therefore the value received by the seller in an earnout.

Where complexity has the potential to lead to future headaches for the parties, the best approach is often to keep matters as simple as possible. The parties should consider obtaining input from their financial advisors on the wording of the SPA, to ensure that clauses governing purchase price adjustments are clearly set out and do not contain gaps or contradictions.  They should also consider including worked examples in order to avoid ambiguity, such as defining how key performance indicators (for instance, “profit”) are calculated for the purposes of calculating a seller earnout.

 

5. Don’t let deal dynamics derail your decision-making

 

Finally, from a more holistic perspective, the particular dynamics of an M&A deal may increase the risk of a dispute. For example, the buyer may be under time pressure to complete a deal before a certain deadline (e.g. a year-end), or otherwise under pressure from its shareholders or lenders to see an acquisition through, meaning that it may not dedicate the requisite time and care to the due diligence process or to drafting the SPA. Alternatively, if a buyer has already made an investment decision, such as for strategic reasons, they may not be open to “bad news” brought to light during the due diligence process which could have an impact on value.

In certain circumstances, the purchase price may be driven by factors which do not correlate to value, such as unsuitable multiples or where a competitive bidding process gives power to the seller in negotiations. It may also be the case that the buyer has not fully understood the key drivers of value prior to signing as a result of inadequate communication with its advisors during the due diligence process.

The risks associated with such circumstances may be difficult to mitigate. The buyer may wish to perform scenario modelling early in the acquisition process to ensure that they are aware of the range of possible outcomes of the transaction and consider whether they wish to proceed on that basis.

Nevertheless, best practice dictates that:

• The parties should be clear on the financial consequences of their respective intentions, and ensure that this is adequately reflected in the SPA (with protections in place as required);
• Advisors should be involved as early as possible in the M&A process in order to identify risks (including the risk of disputes arising at a later stage) and minimise these to the extent possible; and
• From the buyer’s perspective in particular, robust communication channels should be put in place between different advisors, to ensure efficient knowledge-sharing during the due diligence process and so that the buyer is able to make as informed decisions as possible during negotiations.

 

Concluding thoughts

In an M&A deal, both the buyer and seller are seeking to maximise the value they obtain from a deal. Often, there are internal or external pressures to “get the deal done”. In such circumstances, it is not surprising that many M&A deals end up in a dispute.

The risk of a dispute is especially prevalent where the parties use completion accounts or include other post-closing purchase price adjustments in the SPA. A recent study by Grant Thornton covering almost 4,000 M&A deals found that 26% of deals with working capital adjustments, and 36% of those with an earnout mechanism, ended up in a dispute.²

Parties may therefore consider reducing uncertainty over the purchase price by using a locked box completion mechanism. However, this does not completely eliminate potential tensions between the parties; in particular, the “leakage” of value between signing and closing will be of concern to the buyer, who will inevitably place a greater reliance on SPA warranties and indemnities for protection.

The parties can safeguard their interests by engaging financial advisors (including those with disputes experience) as early as possible in the M&A process, to ensure all key financial items are properly defined in the SPA, accompanied by specific, prescriptive accounting policies with a clear accounting hierarchy and supporting examples and account mapping. Clarity and simplicity are fundamental principles when drafting the SPA, and giving due care and attention to the SPA’s wording can pre-empt the need for lengthy and costly disputes at a later date.

Regardless of completion mechanism, the buyer should ensure that due diligence on the target carried out pre-signing is thorough, and that findings are properly reflected in negotiations and in the SPA. Efficient communication between due diligence streams can ensure that risks are captured in a timely fashion and enable buyers to make informed decisions during the acquisition process.

 

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¹ https://www.womblebonddickinson.com/us/insights/alerts/earnout-deals-surge-uncertain-times-what-ma-professionals-need-know-about-earnouts

² https://www.grantthornton.com/content/dam/grantthornton/website/assets/content-page-files/advisory/pdfs/2024/ma-dispute-survey-2023-report.pdf

 

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Authors: Louis Osman, Edmond Richards, Charlene Burridge and Maren Burtoft.