Nearly Half of M&A Deals Wind Up in Accounting Disputes

By Adam Zaki for CFO.com

Mergers and acquisitions (M&A), an area slumping lately, is a strategy finance leaders had previously been keen on using this year. Whether a CFO is a buyer or a seller, tough regulators, expensive capital, and pandemic ripples have resulted in a less-than-ideal M&A market.

This past year, deals have been held up by a variety of accounting disputes. In a Grant Thornton survey of 189 US-based M&A professionals (including private equity investors, corporate development officers, and legal counsel) who had completed more than 1,300 deals in 2023, nearly half said their deals involved some type of accounting dispute — with 47% having an earn-out dispute and 46% a working capital dispute. While the number of deals has increased for the M&A leaders surveyed, the uptick in disputes has caused issues for buyers, sellers, and presumably their CFOs.

Data shows that, although disputes can be unique to the deal, there was some consistency in resolutions. Of the working capital disputes recorded, 30% of respondents who were part of a working capital dispute settled it before a formal dispute or objection notice. Another 10% said they settled their quarrels in good-faith negotiations.

For earn-out disputes, remedy rates were more rigid than those for working capital. About 38% were resolved before a formal dispute or objection notice. Only 6% of earn-out disputes were remedied by good-faith negotiations.

To avoid confusion during negotiation or closing, many M&A veterans focus on avoiding vague language. CFOs, whose role as communicators has increased, undoubtedly have a role in making sure that no matter which side of a deal their company is on, the process can be easily halted if there is a lack of clarity in the details. 

Half of the respondents said they counter vague language with increased use of an accounting hierarchy or specific accounting policies. Forty-four percent of M&A leaders said they use specific accounting policies more often during the M&A process.

The survey noted, “many agreements still suffer from imprecise language around the calculation of working capital and earn-outs, or from an over-reliance on GAAP as a panacea.” Some respondents are taking the initiative to bridge the gaps of GAAP to clarify language. Nearly a quarter (23%) said they rely on GAAP consistently applied less.

Communication must be agreed upon regarding elements that may impact the deal later. For working capital adjustment post-closing, most M&A leaders set a deadline, presumably to assess the adjustment properly.

Over four in 10 (42%) respondents said they don’t accept new information after the buyer/seller submits their closing balance sheet. Nearly a quarter (23%) select another hard cut-off date, alongside 15% who give the other party until the deal’s closing date.

For deals based on earn-outs, M&A leaders differ on which metric, or combination thereof, is the best way to determine the deal’s value and both parties’ evaluation of the company. According to findings, EBITDA is the most popular method, favored by over a third (34%) of respondents. Over a fifth (22%) go purely off gross revenue, while 21% use a combination of both.