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28/10/2022

M&A: Knowing how to anticipate risks

M&A et aléas

In uncertain economic times, acquirers are becoming more cautious and are more inclined than in the past to include exit clauses to contracts in the event of a major external event. Experts from AURIS Finance, an advisory firm specialising in M&A transactions, provide you with the latest market trends.

For the time being, the French market is resilient and M&A activity, particularly among small and mid-caps (ETIs and SMEs), remains buoyant. However, the macroeconomic environment remains worrying, with risks multiplying: sanitary, geopolitical and inflationary. Against this backdrop, potential buyers are more vigilant than before. If they are not taking a wait-and-see approach, they are multiplying contract clauses to protect themselves in the event of a market downturn.

Leaving exit doors open

Confinement periods during Covid, leading to a sudden halt in economic activity, seem to have left a lasting impression on investors. In order to secure future transactions, they are now relying on new legal instruments such as material adverse change (MAC) clauses, which originated in English-speaking countries. These clauses, which allow the buyer to withdraw from negotiations in the event of an event exogenous to both parties but having a direct impact on the target company, are increasingly being used in sale agreements. Experts have noted that these clauses are used in contracts at the end of each major crisis, i.e. in 2008 after the financial crisis and in 2020 during the Covid-19 crisis.

Anticipating a possible price correction

Another noteworthy change is the tense situation surrounding purchase prices. With the crisis, some companies have seen their valuations drop sharply. However, this is not the case for all companies that are candidates for sale, especially high-growth companies. Investors now fear a price correction. To avoid this, more and more investors are using price adjustment mechanisms. According to a 2010 study by law firm CMS, the majority of investors used locked-box mechanisms ten years ago. However, this trend is now reversing. More and more acquirers are opting for an earn-out clause, which allows for price adjustments based on the future performance of the target company. This mechanism can protect against a potential decline in the target’s profitability in the three to four years following the acquisition.

More thorough investigations

The worrying macroeconomic environment and uncertainty about valuation levels are causing buyers to be more vigilant. They pay particular attention to the period between signing and closing. During this period, investors are especially attentive to the way in which the target company operates. Teams are carefully analysed and it is not uncommon for clauses to be added to ensure the retention of key personnel. In order to secure their target, buyers ask for increased control during this sensitive period. This is clearly stated in the terms of the sale agreement.

Get the support you need

In uncertain times, nothing can be left to chance. Drafting material adverse change (MAC) clauses and earn-out mechanisms is technical and requires professional support. From the identification of the target company to the completion of the transaction, including the performance of a thorough due diligence and the drafting of the acquisition or sale agreement, AURIS Finance’s sector specialists will assist you.

Contact us


#AURIS Finance #Mergers & Acquisitions