The use of refined closing mechanisms and tailored accounting provisions in an acquisition purchase agreement can prevent many of the most common post-close disputes. However, in some transactions these innovative methods can create a new set of risk. The participants in this discussion considered both the positive and negative characteristics of working capital adjustments, earnouts, and lockboxes.

Faculty member Sarah Dalton, from the Forensic and Integrity Services practice at EY, began the discussion by asking how value drivers are identified, measured, and agreed upon by the parties.  

Hiran Thacker, from the M&A Corporate Development group at Cisco, discussed the need to “socialize” a value creation plan so that the entire deal team understands the goals of the transaction. To avoid disputes later on, Thacker advised the audience to “ask leaders to commit” to specific value drivers so that there are clear milestones and goals.

The participants next considered how post-closing mechanisms are impacting due diligence strategies. With increased scrutiny over earnouts, lockboxes, and other post-closing control frameworks, buyers are increasingly relying on robust due diligence for deal certainty. Mark Legaspi, Associate General Counsel and Director of Corporate Strategy, M&A, Investments, and Emerging Technology at Intel, noted that better due diligence can help alleviate deal uncertainty, limit post-closing adjustments, and avoid last-minute disputes.

“It depends on how many post-closing contingencies you can build in,” said Rachel Masory, Deputy General Counsel at Golden Gate Capital, when determining the robustness of due diligence. Masory added that transactions with smaller companies typically have more post-closing contingencies because the due diligence is limited or less reliable, whereas deals involving public companies often have robust due diligence and fewer post-closing contingencies.

During final negotiations of the purchase agreement, the industry experts advised the audience to carefully define how working capital would be calculated and determined after closing. Dalton contributed further, advising clients to build a comprehensive list of exceptions that are in the purchase agreement. Using this strategy, the in-house M&A team should have a better grasp on the provisions of the agreement and avoid any last-minute surprises.

The panel concluded with discussions about specific post-closing mechanisms designed to quell pre-closing negotiation disagreements. Working capital adjustments and earnouts were the center of this conversation. Masory cautioned that a mechanism, such as an earnout, is only a viable option to avoid disputes if “the thing that triggers the earnout… is an indicator of sustained performance” rather than a temporary trigger.

The consensus view was that a well-articulated purchase agreement can help alleviate potential sticking-points early on in the negotiation process.  For example, Legaspi suggested any “effort language” in the purchase agreement should be specific and require sustained performance.