M&A surge could be a catalyst for new challenges, Grant Thornton survey finds

The survey of more than 150 dealmakers shines a light on the rise of SPACs and new kinds of earnout disputes

CHICAGO — According to a recent survey by Grant Thornton LLP, the majority of merger and acquisition (M&A) dealmakers expect a surge in deal volume, especially in the technology, retail, hospitality and insurance industries.

For this survey of M&A professionals, Grant Thornton polled 44 C-suite executives, 39 private equity leaders, 40 investment bankers and 40 attorneys. Eighty-five percent of these respondents expect deal volume to stay the same or increase over the next six months. Furthermore, a potential increase in capital gains taxes will likely spur private owners to close deals before the end of 2021.

“Private equity has significant levels of capital from recent fundraising,” says Elliot Findlay, Grant Thornton’s national managing principal of Mergers and Acquisitions. “The exhaustion from COVID-19 also has some private business owners saying, ‘We weathered the storm, but I don’t want to do that again — let’s take some money off the table.’”

According to Findlay, the changing tax landscape for capital gains has created anxiety for many private business owners — especially those that are nearing an exit in the next few years.

In the survey, 86% of respondents indicate they expect to see valuations stay steady or increase in the next six months. The survey also found that high valuations will be driven by both the appetite for deals and the ongoing increase in special purpose acquisition companies (SPACs).

Despite the Securities and Exchange Commission’s recent crackdown on SPACs, 89% of survey respondents predict the SPACs trend will continue or grow over the next year. Just 6% say the SPACs trend has peaked and will disappear quickly.

A rise in earnouts and disputes

The Grant Thornton survey also indicates a rise in the volume and value of earnouts — but that rise could come with some caveats. Nearly all survey respondents — a total of 94% — say they expect to use earnouts in at least 70% of their deals over the next six months.

“The volume of respondents expecting 90 to 100 percent of deals to have an earnout is staggering,” says Max Mitchell, Grant Thornton’s Purchase Agreement Advisory leader. “If they’re right, then almost every deal will have an earnout by the end of the year.”

Todd Patrick, a principal and head of Valuation and Modeling at Grant Thornton, posits that earnouts could be a natural response to the precariousness endured by businesses over the last 18 months.

“There’s so much uncertainty in the market,” Patrick says, “and earnouts are a way to mitigate that uncertainty.” Yet as this survey reveals, many businesses are evaluating the details of those earnouts. Specifically, dealmakers polled for the Grant Thornton survey say a rise in M&A volume could lead to a rise in earnout disputes.

Charles Blank, a Forensic Advisory Services managing director at Grant Thornton, says earnout disputes typically arise when a seller contests the buyer’s accounting or earnout metrics.

“Sellers have been recently challenging whether pandemic-related adjustments should be made to earnout metrics,” Blank says. “Many of the disputes happening right now relate to transactions that closed before the pandemic, when we did not have provisions in place addressing business shutdowns. We’re now in uncharted territory, where businesses and their leaders are trying to reconcile what impact those shutdowns should have on earnouts.”

Looking to the future

The seasoned dealmakers engaged for this survey conclude that foresight and responsiveness are now more important than ever.

“It’s certainly always been prudent to be as thorough as possible with valuations and earnout calculations,” adds Findlay. “But given the evolving nature of the current market, it’s vital for all dealmakers to understand the potential volatilities of their industry. You may be well-versed in the intricacies of your business right now, but you have to develop a critical understanding of how your industry will change.”

To see additional findings, trends and recommendations from Grant Thornton’s recent survey of M&A dealmakers, visit www.grantthornton.com/MandAPulseSurvey.