How to Handle Disputes in M&A Negotiations

Brandon Chicotsky
Nov 1
16 min read

Disputes in M&A negotiations can derail deals, waste time, and harm relationships. Resolving disagreements effectively is key to protecting deal value and ensuring smoother outcomes. Common issues include earnout disagreements, working capital adjustments, and unclear contract terms. To minimize risks:

Spot problems early: Watch for red flags like discrepancies during due diligence or vague contract language.
Draft clear agreements: Define financial metrics, timelines, and dispute resolution processes upfront.
Use structured resolution methods: Start with negotiation, escalate to mediation or arbitration if needed, and reserve litigation as a last resort.
Involve experts: Financial advisors, CPAs, and legal professionals can clarify complex issues and offer objective guidance.

Common Disputes in M&A Transactions

In M&A deals, disputes often arise from the intricacies of deal mechanics, especially in high-stakes transactions. Knowing where these conflicts typically emerge enables parties to address potential issues proactively and minimize escalation. Below, we’ll explore the main sources of disputes, the risks of unclear contract terms, and how to recognize potential conflicts early.

Main Sources of Disputes

One of the most common triggers for disputes in M&A transactions is earnout mechanisms, which account for 30% of post-closing conflicts, according to a 2022 SRS Acquiom study. These disputes often revolve around disagreements over financial calculations or changes to business operations after the deal closes. For example, disputes may arise over whether performance targets were met or if buyers altered operations to avoid making earnout payments.

A notable case in 2021 involved a $6.4 billion earnout dispute between Bristol-Myers Squibb and Celgene. The conflict stemmed from allegations of delayed regulatory approvals. Ultimately, arbitration ruled in favor of Celgene shareholders, resulting in a payout [6].

Working capital adjustment disputes are another frequent issue, affecting around 20% of M&A deals. These conflicts typically arise when parties interpret accounting methods or definitions differently. Similarly, valuation disagreements occur when there’s a lack of consensus on how to allocate the purchase price between tangible and intangible assets. Lastly, representations and warranties claims - which appear in 10–15% of transactions - often involve undisclosed liabilities or financial misstatements [6].

Common Dispute Area	Frequency	Typical Trigger
Earnout Mechanisms	30%	Performance target disagreements, calculation disputes
Working Capital Adjustments	20%	Differing accounting methods or definitions
Representations & Warranties	10–15%	Undisclosed liabilities, financial misstatements

Problems with Unclear Terms

In addition to these common dispute areas, ambiguous contract language can make matters worse. For example, vague definitions - such as unclear EBITDA metrics - often lead to costly post-closing disagreements [5].

Consider a recent case where a buyer and seller clashed over post-closing EBITDA calculations due to poorly defined cost allocation terms. This lack of clarity resulted in a $10 million dispute, which required arbitration to resolve. The process caused significant disruption and expense [5].

Similarly, earnout terms that lack clear performance metrics or dispute resolution processes can create further complications. Without well-defined parameters, these agreements are ripe for conflict [5].

Spotting Disputes Early

Recognizing potential disputes early can save time, money, and relationships. One early warning sign is discrepancies uncovered during due diligence. These inconsistencies may reveal differences in how key metrics are calculated or reported [6]. Additionally, conflicting interpretations of contract terms during negotiations often signal potential trouble areas.

Another red flag is resistance to defining critical terms, such as calculation methodologies or performance metrics. This hesitation can indicate underlying concerns that may lead to disputes down the line. To mitigate these risks, consistent communication and thorough documentation are essential. Clearly defining all agreements and assumptions upfront is key to avoiding misunderstandings [6].

For example, the 2019 Johnson & Johnson acquisition of Auris Health, Inc. for $3.4 billion - plus $2.35 billion in potential earnouts - highlights the value of early intervention. When disagreements over milestone achievements arose, the parties quickly turned to mediation. This proactive approach allowed them to resolve the issue without resorting to litigation [3]. Cases like this underscore the importance of addressing disputes early and maintaining clear communication throughout the M&A process.

Writing Clear Dispute Resolution Clauses

A well-thought-out dispute resolution clause is essential in M&A deals. These clauses outline clear procedures for resolving conflicts, reducing confusion, and minimizing the risk of costly litigation[4][7]. They play a crucial role in protecting deal value and ensuring smoother post-deal relationships.

By specifying how disputes will be handled upfront, you can avoid expensive and time-consuming court battles. Proper planning in this area often prevents conflicts from escalating unnecessarily.

Key Parts of Resolution Clauses

An effective dispute resolution clause should include several important components, each contributing to a clear and structured conflict resolution framework.

Escalation procedures lay out a step-by-step approach, starting with direct negotiation before moving to mediation or arbitration[4]. This method prioritizes quick, business-focused solutions while avoiding the expense and delays of litigation.

The selection process for mediators or arbitrators is another critical element. The clause should define the qualifications required - such as expertise in M&A, finance, or law - and detail how these neutral parties will be chosen[4][7]. Some agreements specify pre-approved lists, while others rely on professional organizations like the American Arbitration Association to appoint mediators or arbitrators.

Clear definitions of financial terms can prevent many disputes from arising in the first place. Defining metrics like EBITDA and working capital calculations using established standards (e.g., GAAP) ensures both parties are on the same page[5][6]. Adding sample calculations or referencing independent third-party standards enhances clarity.

Timelines for each stage are essential for keeping the process efficient. Specify deadlines for direct negotiation, mediation initiation, and arbitrator selection. Without clear time limits, disputes risk dragging on indefinitely.

Jurisdiction and governing law determine where and under what legal framework disputes will be resolved. For U.S. transactions, this often involves specifying the laws and courts of a particular state.

Confidentiality provisions ensure that all communications related to the dispute remain private, except where disclosure is legally required[4][7].

Comparing Resolution Methods

Once the key components of your clause are in place, it’s important to evaluate which resolution method best fits your situation. Each method offers distinct advantages and drawbacks, as summarized below:

Method	Pros	Cons	Best Use Scenarios
Negotiation	Fast, private, preserves relationships	May not resolve complex issues	Early-stage, less complex disputes
Mediation	Flexible, confidential, cost-effective	Non-binding, may not result in agreement	When parties want to preserve goodwill
Arbitration	Faster than litigation, binding, private	Can be costly, limited appeal rights	Technical or financial disputes
Litigation	Binding, public record, full legal process	Expensive, time-consuming, public exposure	High-stakes, precedent-setting disputes

Negotiation is the simplest and fastest option, making it ideal for straightforward disagreements where both sides are motivated to find a quick solution. However, more complex issues may require additional structure.

Mediation provides a confidential and flexible forum for resolving disputes. A mediator facilitates discussions without imposing a decision, making this approach particularly useful for earnout disputes or working capital adjustments where creative solutions can benefit both sides[4]. Keep in mind, though, that mediation is non-binding, so there’s no guarantee of resolution.

Arbitration is often the preferred choice for technical financial disputes or post-closing adjustments. It provides binding decisions from experts with M&A knowledge, ensuring that specialized issues are addressed effectively[4][5]. However, arbitration can be expensive, and the ability to appeal is limited.

Litigation should be considered a last resort. While it offers a full legal process and binding outcomes, the public nature, high costs, and lengthy timelines make it less appealing for most M&A disputes. It’s best reserved for high-stakes cases or situations where legal precedent is necessary.

When drafting your clause, consider a tiered approach. Start with direct negotiation, move to mediation if necessary, and reserve arbitration or litigation for unresolved cases. This structure provides multiple opportunities to resolve disputes efficiently while preserving business relationships.

Well-structured clauses not only facilitate dispute resolution but also help prevent conflicts from arising in the first place. Working with experienced professionals is key to crafting these clauses effectively. For example, business brokers like God Bless Retirement, specializing in M&A transactions for businesses under $25 million EBITA, can connect you with CPAs, financial planners, and private equity experts who can tailor dispute resolution mechanisms to your specific needs.

Step-by-Step Guide to Resolving Disputes

When disputes crop up during M&A negotiations, having a clear plan can help avoid wasted time, unnecessary costs, and strained business relationships. Here's a practical framework to guide you from the first sign of disagreement to a final resolution.

Step 1: Direct Negotiation Between Parties

Start with direct negotiation - it’s the simplest and most straightforward way to address disputes. This approach encourages open, honest communication aimed at solving problems rather than assigning blame. Focus on reviewing key documents and clarifying any unclear terms in the contract together.

Set up a meeting (either in person or virtual) with just the key decision-makers. Regular check-ins during the due diligence phase can also help align expectations and clear up misunderstandings early. For example, if there’s confusion about working capital calculations, revisit the original purchase agreement and go through the specific language together. Be sure to document these discussions and share follow-up summaries. This not only keeps everyone on the same page but also helps avoid similar disputes down the line. However, if you hit a roadblock, it might be time to bring in outside expertise.

Step 2: Bringing in Independent Experts

When technical issues arise or direct talks stall, independent experts can provide clarity. These professionals offer specialized knowledge to help untangle complex issues and provide an objective analysis.

For financial matters like purchase price adjustments or working capital disputes, certified public accountants (CPAs) can be especially helpful. For instance, in one mid-market acquisition, initial negotiations addressed working capital adjustments, but disagreements over earnout calculations required input from a CPA. Their analysis led to a mediated settlement.

Beyond financial experts, industry specialists and legal professionals can provide valuable insights into market trends, competitive dynamics, or complex contract language. Choose experts with strong credentials whose evaluations are respected by all parties involved - buyers, sellers, courts, and even the IRS. Some firms, like God Bless Retirement, maintain networks of trusted advisors, including CPAs, valuation experts, and private equity professionals, to offer unbiased assessments. If expert input still doesn’t resolve the issue, mediation is the next logical step.

Step 3: Mediation as a Flexible Option

Mediation is a practical option when negotiations and expert opinions haven’t fully resolved the dispute. In this process, a neutral third party helps facilitate discussions, aiming for a mutually acceptable, non-binding agreement.

Mediation has several benefits: it’s cost-effective, flexible, and helps preserve business relationships. It’s particularly useful for resolving disputes like earnout disagreements or complex working capital adjustments. A skilled mediator can help craft creative solutions that address the concerns of both sides. Typically, each party meets with the mediator privately before moving to joint discussions. However, since mediation isn’t binding, there’s no guarantee of a final resolution. If mediation doesn’t work, arbitration or litigation may still be necessary.

To improve your chances of success, select a mediator experienced in M&A disputes. Organizations like the American Arbitration Association offer specialized services for these situations, focusing on privacy and efficiency. Including clear mediation clauses in contracts - outlining how mediators are chosen and how the process will unfold - can also be a game-changer.

Step 4: Moving to Arbitration or Litigation

If all else fails or a binding decision is required, arbitration or litigation becomes the next step. Arbitration is often the go-to option for M&A disputes because it’s quicker and more private than litigation. Most arbitration cases are resolved in under a year, while litigation can drag on for years.

Arbitration delivers a final, enforceable decision, but it does come with higher costs and limited options for appeal. Once the arbitrator makes a ruling, it’s typically final.

Litigation, on the other hand, should be a last resort. It offers broader legal protections and the possibility of appeals, but it’s usually more expensive, time-consuming, and public. This can expose sensitive business details and potentially harm reputations.

Before diving into formal proceedings, weigh the financial stakes, the time involved, and the potential impact on business relationships. In many cases, the cost and disruption of a lengthy legal battle may outweigh the benefits, making a negotiated settlement the more practical route. If escalation is unavoidable, make sure to involve experienced M&A legal counsel to guide you through arbitration or litigation.

How to Prevent Disputes Before They Start

The smartest way to handle M&A disputes? Stop them before they even begin. A Harvard Business Review study found that 70% of M&A disputes could have been avoided with better due diligence and clearer contract terms[5]. Taking proactive steps not only saves time and money but also helps maintain strong business relationships.

The Role of Thorough Due Diligence

Think of due diligence as your first layer of protection against future conflicts. It’s essential to review financial records, legal documents, operations, intellectual property, and regulatory compliance[5][9]. This process helps uncover potential problem areas before they snowball into disputes.

Take, for example, a 2022 deal involving a mid-sized manufacturing company. Both the buyer and seller brought in independent valuation and accounting experts early in the process. This created a shared understanding of key metrics and methodologies, avoiding disagreements after the deal closed and paving the way for a smooth integration[6]. The upfront investment in due diligence saved them from costly headaches down the line.

One particularly important area to focus on? Validating representations and warranties. Many disputes arise from breaches in these provisions, but thorough due diligence can catch potential issues before they cause trouble. Don’t overlook the importance of assessing management and operational compatibility, as these factors significantly impact post-deal integration.

Hiring independent experts during due diligence can also make a huge difference. Their objective analysis ensures all relevant information is reviewed and properly documented. Once risks are identified, the next step is setting crystal-clear expectations.

Setting Clear Expectations

Armed with insights from due diligence, it’s time to clarify every detail of the deal. Clearly defining the deal structure, financial metrics, and earnout terms can prevent many common disputes[5]. Whether the transaction is an asset purchase or a stock purchase, every element needs to be spelled out in detail.

Financial metrics, in particular, are a common source of conflict. Be specific about how post-closing adjustments will be calculated. Include detailed schedules and examples in the agreement to eliminate ambiguity. For earnout provisions, set clear, measurable targets with objective criteria to avoid misinterpretation.

Here’s why this matters: In one case, vague definitions around cost allocation led to a $10 million dispute over post-closing EBITDA calculations. The issue was eventually resolved through arbitration, but not before both sides incurred substantial costs and disruptions[5].

Regular communication during the due diligence phase is another key to avoiding disputes. Schedule check-ins with decision-makers to review progress and address concerns early. Document these discussions and share follow-up summaries to ensure everyone stays aligned.

Using Expert Support

Sometimes, internal efforts aren’t enough. That’s where external expertise comes in. Specialized brokers and advisors can significantly reduce the risk of disputes. These professionals provide certified business valuations, connect qualified buyers and sellers, and manage the entire M&A process with confidentiality. For instance, God Bless Retirement offers access to CPAs, financial planners, and private equity experts who can guide due diligence and contract drafting. Their focus on confidentiality protects sensitive information and fosters trust between parties.

NACVA-certified valuations are particularly helpful because they’re widely accepted by buyers, sellers, banks, courts, and even the IRS. This broad acceptance eliminates arguments over valuation methods and provides a solid foundation for negotiations. Avoid relying on rough estimates - they can lead to major financial discrepancies later.

Experts can also strengthen confidentiality protocols during due diligence. Tools like non-disclosure agreements, secure data rooms, and clear information-sharing procedures minimize the risk of leaks or unauthorized disclosures[3]. Technology platforms can further streamline these processes, automating NDAs and securely managing documentation.

While expert support involves some upfront costs, it’s worth it. Around 30% of M&A deals face post-closing disputes, and many of these could have been avoided with proper guidance[6]. By bringing in the right advisors, you’re not just reducing risks - you’re setting the stage for a smoother, more successful transaction.

Protecting Relationships and Long-Term Value

Preserving relationships and ensuring long-term value are essential for the success of any transaction. The way conflicts are managed today can significantly impact your reputation, future opportunities, and the overall outcome of the deal.

Keeping Emotions Out of Business Issues

When stakes are high, it's crucial to keep discussions neutral and grounded in data. Letting emotions take over is a surefire way to damage both value and relationships. The best approach? Focus on shared business goals and let objective data drive the conversation[8].

Both buyers and sellers share a common goal: a successful transaction. Buyers want a profitable acquisition, while sellers seek fair compensation. When disagreements arise, steer the discussion back to these shared objectives. For instance, instead of saying, "You're being unreasonable", try, "Let's review the data and find a solution that benefits both sides."

Staying objective in negotiations takes discipline but is absolutely necessary[8]. Use structured agendas to guide discussions, and stick to facts rather than personal opinions. If emotions begin to flare, take a break and regroup when everyone is calm. Bringing in a neutral facilitator can also help keep the conversation productive and prevent unnecessary escalation.

Regular communication is another key to avoiding conflict. Address potential issues early and document all discussions with follow-up summaries. This creates transparency and minimizes misunderstandings.

"Relationships are at the core of our client care. God Bless Retirement aims to be synonymous with strengthening families. That is our purpose." [1]

When relationships are prioritized over short-term gains, you set the stage for long-term success. Encouraging open communication and addressing concerns early fosters a professional atmosphere[8]. Plus, maintaining objectivity during negotiations helps ensure smoother integration after the deal closes.

Handling Post-Closing Conflicts

Disputes after a deal closes - such as disagreements over earnout calculations, working capital adjustments, or breaches of contract - must be handled with care. These conflicts can either solidify the value of the deal or turn it into a costly problem.

Start by revisiting the contract terms. Well-drafted agreements provide clear guidance for resolving disputes while protecting relationships. If the terms are ambiguous, bringing in independent experts to interpret financial or operational data can help both sides reach a fair resolution[3][5].

Integration issues, in particular, need attention as they can erode deal value. Clearly define post-closing roles, schedule regular check-ins, and address operational or organizational differences as soon as they arise[5]. If the seller's management team remains involved, ensure everyone understands their new responsibilities and reporting lines.

Creating integration teams with members from both sides can help identify potential issues early and encourage collaborative solutions. Involving integration specialists and maintaining open communication are also effective ways to prevent conflicts from escalating into formal disputes[5].

Confidentiality remains just as important after the deal closes. Internal disagreements among employees, investors, or partners can harm business value and complicate conflict resolution. Protecting confidentiality safeguards the overall value of the business.

When disputes do occur, structured processes like mediation or arbitration can help resolve them efficiently and privately[3][5]. These approaches are faster and less adversarial than litigation, preserving relationships while addressing issues effectively.

By using these strategies, businesses can not only resolve immediate conflicts but also protect their reputation and position themselves for future success.

Reputation and Future Transactions

How conflicts are resolved has a lasting impact on your reputation in the business community. In mergers and acquisitions, your reputation is one of your most valuable assets. The way post-closing disputes are handled can shape how others perceive your professionalism and reliability[4].

Efficient, fair, and confidential resolutions show that you can be trusted, making future partners more likely to work with you[4]. Buyers and sellers alike want to collaborate with people who demonstrate integrity and a commitment to win-win outcomes. This approach strengthens relationships and creates opportunities for future deals.

On the other hand, public disputes can deter potential partners and damage your long-term prospects[4]. Even if you "win" a particular conflict, the cost to your reputation may outweigh the immediate benefits.

Working with experienced professionals and including clear dispute resolution clauses in contracts can help safeguard both the transaction and future opportunities. For example, businesses with earnings under $25 million EBITA often benefit from tailored support and proactive conflict management.

The key is to think beyond the current deal. Draft clear dispute resolution clauses, document agreements and communications thoroughly, and choose collaborative resolution methods like mediation[2][4]. After resolving any disputes, take time to reflect and identify lessons learned. Updating internal processes based on these insights promotes continuous improvement and builds trust for future transactions.

Conclusion: Key Points for Handling M&A Disputes

Successfully navigating M&A disputes hinges on preparation, clear communication, and the right expert guidance. As we’ve covered, taking proactive steps to prevent disputes and having structured approaches for resolution are crucial.

Conducting thorough due diligence and drafting precise contracts can significantly lower the chances of disputes. By clearly defining key metrics and expectations upfront, you reduce ambiguity. For instance, keeping sellers informed about company performance during earnout periods can help prevent misunderstandings or accusations of manipulation [2].

Including clear resolution clauses in contracts is another critical step. These clauses pave the way for resolving disputes early through negotiation, mediation, or arbitration. Research shows that mediation and arbitration can cut resolution times by as much as 50% compared to litigation [4]. These methods not only save time but also help preserve the deal’s long-term value.

For smaller businesses, particularly those with EBITA under $25 million, specialized brokers like God Bless Retirement offer tailored M&A management services. These include certified valuations, a trusted network of CPAs and advisors, and expert guidance to address complex issues - all while ensuring confidentiality.

"Our mission is to strengthen families for generations to come." – God Bless Retirement [1]

Maintaining professionalism and protecting relationships is equally important. Collaborative strategies, such as mediation, allow businesses to resolve disputes efficiently while preserving valuable partnerships. A strong reputation in the M&A community is invaluable, and how you handle disputes today can directly influence your ability to close future deals.

Finally, act swiftly to address conflicts. Post-closing disputes arise in 30–40% of M&A transactions [6]. Pre-agreed dispute resolution mechanisms and involving independent experts for technical matters can prevent these conflicts from escalating into costly legal battles. By integrating these practices, you can build a foundation of trust and clarity for every transaction moving forward.

FAQs

What steps should you take during due diligence to avoid disputes in M&A negotiations?

To reduce the chances of disputes during mergers and acquisitions (M&A) negotiations, thorough preparation and due diligence are key. Start by clearly outlining the scope of the review. This should cover areas like financial records, legal obligations, operational details, and potential liabilities. A well-defined scope ensures everyone is on the same page and helps identify any issues early in the process.

Maintaining open and honest communication is equally important. Share accurate, comprehensive information and address any concerns as they arise. This approach fosters trust among all parties. Bringing in seasoned professionals - such as business brokers, CPAs, and legal advisors - can also make a big difference. Their expertise can help identify potential conflicts and resolve them before they grow into larger problems.

For businesses with an EBITA under $25 million, working with a specialized partner like God Bless Retirement can be especially beneficial. Their experience in M&A, commitment to confidentiality, and access to a wide network of experts can streamline negotiations and help prevent disputes from derailing the process.

How can mediation help resolve earnout disputes during M&A negotiations?

Mediation serves as a practical way to address earnout disputes in mergers and acquisitions (M&A). By encouraging open dialogue and cooperation, mediation allows both parties to better understand each other’s priorities, clear up any confusion, and work toward a solution that works for everyone. Compared to litigation, this approach often saves time, cuts down on legal expenses, and helps maintain professional relationships.

When dealing with the complexities of M&A transactions, having seasoned professionals by your side can make all the difference. Companies like God Bless Retirement offer expert support throughout the buying and selling process. They ensure confidentiality and provide access to a network of specialists - such as CPAs and financial planners - helping to facilitate smoother negotiations and resolve disputes effectively.

Why is it beneficial to involve independent experts in resolving disputes during M&A negotiations?

Bringing in independent experts during M&A disputes can offer an unbiased viewpoint and streamline the resolution process. Professionals like valuation experts or financial planners contribute their specialized knowledge to provide precise assessments, which can help minimize the chances of drawn-out conflicts.

God Bless Retirement links clients with a reliable network of professionals who can navigate the intricacies of negotiations, making the process more straightforward and increasing the chances of a positive resolution.