Buyer’s Remorse Claims Rise as Valuations Soften: Navigating Post-Closing Disagreements

Strategic buyers are playing a more active role in M&A activity in 2023 compared to financial buyers. The market has witnessed a pullback in cross-border M&A, driven by a more opportunistic and strategic approach among buyers. Smaller deal values are prevalent, indicating a trend toward localized transactions.

Experts from M&A technology and logistics provider SRS Acquiom shared these insights during a recent webinar with Today’s General Counsel. Their observations shed light on the evolving dynamics that buy-side professionals need to consider in the current landscape as they aim for smarter due diligence.

The market has experienced a significant softening of valuations in 2023, following the record-setting year of 2021. Smaller deal sizes have become more prevalent, with distress becoming noticeable, especially in the tech sector. Post-closing claims stemming from the 2021 market are diverse, ranging from challenges related to contract accuracy to a notable rise in tax-related claims. Understanding the nuances of these claims is crucial for successful post-closing management.

“If you’re thinking about including an earnout on your deal, which can be an effective way to get these deals done, particularly in a tough market where there may be differences in opinion over the value of the assets or the target company, using an earnout is a great way to kind of bridge those valuation gaps,” said Kip Wallen, Senior Director of Thought Leadership, at SRS Acquiom. “But from the buy-side, you really want to think through and make sure you really understand the target’s business, and that should play in and inform you when you structure the metrics for these earnouts.”

Buyer Remorse Claims:

With the drop in valuations from the peak of 2021, buyers are making claims akin to buyer remorse, attempting to recoup amounts paid during the high-valuation period. These claims, often inflated in potential exposure, contribute to disagreements between parties during the escrow release process, as Elisheva Paton, Senior Director at SRS Acquiom, explained.

“We do see [these situations], and the claims end up being resolved for a lot less than they’re submitted for,” Paton said. “There are exaggerated exposures, and then that leads to a whole other can of worms and disagreements between the parties when, again, it’s time to release your escrow and the buyer has inflated the potential exposure of whatever it’s dug up in the efforts to recoup some of the purchase price, and at the end of the day, they aren’t always successful in doing so.”

These challenges highlight the need for transparency and realistic expectations in post-closing negotiations.

Challenges of Smaller Deals:

Contrary to popular belief, smaller deals do not necessarily equate to simpler post-closing processes. “Sometimes on the smaller deals, there’s a lot of challenges,” Paton said. “Because there’s a lot of smaller pots to deal with, people are much more emotional about the funds that have been held back in escrow because maybe the purchase price wasn’t that high, but could sometimes be a situation where there’s buyer’s remorse.”

These emotional factors can become more pronounced in smaller deals, leading to challenges in resolving claims. The experience and sophistication of the sell-side play a pivotal role in determining the ease of post-closing proceedings. This insight underscores the importance of understanding the dynamics of each deal individually.

This webinar provides a roadmap for M&A professionals, emphasizing the importance of strategic due diligence, transparency, and realistic expectations in navigating the challenges of post-closing processes. Understanding the nuances of buyer types, deal sizes, and valuation trends is essential for success in the ever-evolving landscape of M&A.

Register and listen to a recording of the webinar here.