Post-Closing Risks to M&A Deal Value

In M&A transactions, risks may arise and materialize after the purchase agreement is signed that affect the value of the transaction to the purchaser or seller. Uncertainty regarding the value of the company or its future performance, the post-closing behavior of key stakeholders, and known and unknown claims against the business are just a few of the post-closing risks that can threaten the value of a M&A deal.

Parties to M&A transactions may employ a variety of provisions in their deal documents to address these post-closing risks to deal value. Examples of such provisions include:

• Restrictive operating covenants: restrict the operation of the business during the earn-out period to protect the buyer. Examples of these covenants include non-competition and non-solicitation clauses.
• Earn-out provisions: provide that a portion of the purchase price is contingent upon the business achieving predetermined targets.
• Purchase price adjustment provisions: adjust the purchase price to reflect changes in the business’s value or financial condition that occurred before the deal closed.

Provisions aimed at managing risks that may arise pre-closing must be deployed carefully because they can become the subject of disputes between the parties. Parties to M&A transactions can mitigate this litigation risk by ensuring that such provisions are clearly drafted, and tailored to the business and the market in which the business operates. Buyers and sellers should also be mindful of their duty to perform their obligations under the sale contract in good faith.

Parties seeking to manage pre-closing risks through terms in the deal documents should also anticipate and prepare for potential disputes arising from those provisions. Including a thoughtfully crafted dispute resolution clause in the transaction documents can reduce the time and cost of in-court litigation, and protect the reputation and value of the business.

Where post-closing risks are thoughtfully assessed, they can be managed without creating an outsized litigation risk associated with those mitigation efforts. Professional advisors with experience and expertise in identifying and addressing post-closing mitigation risks can assist in ensuring that the post-closing period is a time of productivity in which the value promised by the M&A deal is realized.