September 26, 2024
Post-Closing Disputes: 2024 M&A Claims Study
SRS Acquiom recently published its 2024 M&A Claims Study, which analyzes more than 850 private target acquisitions with escrows that were fully released during the period from Q3 2022 to Q2 2024. The data set includes 518 individual indemnification claims and nearly 200 earnouts. Here are some of the key takeaways from the study:
Indemnification Claims Relatively Flat – Claim Sizes Trend Up: Indemnification claims activity on a per-deal basis appears to have slightly trended down, with 28% of deals facing a least one post-closing indemnification claim. Conversely, the study also found that deals with Reps & Warranties Insurance (RWI) saw a slightly higher prevalence of indemnification claims. Claim sizes trended up, with a notable increase in claims in the $150,000 to $500,000 size range (Slide 12). Additionally, claims are taking about 25% longer to resolve with about 1 in 27 resulting in formal arbitration or litigation (Slide 18).
Tax Claims Dominate – Undisclosed Liabilities Rise Dramatically: The study found that of the subset of claims examined, tax claims continue to dominate, and undisclosed liability claims more than doubled since the 2022 SRS Acquiom report. Decreased buyer due diligence, among other factors, in the competitive 2021 M&A market may be contributing to this trend.
Earnouts Not Guaranteed, But Some See Success: The study found that the majority of deals with an earnout saw at least partial payment, but only about half of the maximum earnout amount is paid on those deals. The study also found that at least 28% of deals in this dataset were ones in which the sellers contested the earnout. Renegotiations have a big impact, with SRS Acquiom marking over $132 million in additional earnout payments as a result, which is 17% of the earnout dollars paid.
– John Jenkins