M&A deal risks across the retail, food and beverage sectors

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There is cautious optimism that M&A activity will improve in 2024, provided the macroeconomic environment remains stable. As current interest rates remain high, it is expected that distressed M&A will continue to feature in the retail industry, while in the food and beverage sector it is anticipated that strategic reviews may drive M&A activity.

Consequently, buyers may have opportunities in 2024 to make strategic acquisitions for long-term growth, such as targeting new consumer markets or technology related acquisitions to boost capabilities. However, comprehensive risk management to identify and address M&A risks is paramount to the success of acquisitions and disposals.

Acquisition risks for buyers

Buying a business can be a great way to grow a company. However, dealmaking conditions remain challenging and businesses face a growing number of risks which require careful management and mitigation. The success of an acquisition can be impacted by a number of factors, including:

Uninsured or underinsured losses, where an event occurred pre-completion, but comes to light post-completion and is not covered under the policy in place at the time of the incident.
Potential deal value destruction as a result of income losses, additional costs, and reputational damage from key cyber risk scenarios, such as a ransomware attack, not being fully understood and quantified.
Increases in costs, such as the target’s cost of insurance going forward, whether for purchasing insurance or funding legacy liabilities or people costs, where pay and benefits are below market rates and need to be uplifted. These may impact the profit and loss account, the balance sheet, and valuation of the target.
The target’s cybersecurity maturity being insufficient to protect the business, as cyber vulnerabilities can be inherited through transactions.
Sellers giving insufficient recourse in the sale purchase agreement (SPA) for financial losses arising from unknown and unforeseen breaches of warranty or calls under a tax indemnity (Breach), as well as for known, identified risks.
The cost of resilience measures or improvements that are required and need to be factored into bid models, in case of a significant asset base becoming stranded or uninsured over time from climate perils.
Practical and cultural complications around integrating people into the buyer’s business.

Companies embarking on acquisitions face multiple key risk issues. Some of the essential risk and insurance questions buyers should consider when undertaking an acquisition include:

Is insurance cover available to pay for post-completion claims related to pre-completion events?
Have all future insurance and people costs been identified? For example, the cost of purchasing the ‘right’ cover going forward, the impact of adverse claims experiences, losses below deductibles, accrued liabilities, and people-related increases.
Will current and planned cybersecurity capabilities meet the future needs of the business?
Is the seller proposing a low cap for its warranty and indemnity exposure under the SPA?
Does the buyer have concerns about the seller’s financial covenant?
Is the target a distressed target, and are comprehensive warranties and indemnities not being offered?
Will there be an ongoing relationship between the buyer and the seller? For example, where a seller is rolling over its shareholding in the target or a seller will be involved in the target, as an executive officer or employee, post-completion. In such scenarios, in the event of a Breach, the buyer will probably want to avoid suing the seller for the Breach for fear of jeopardising ongoing relations.
Has the buyer discovered a known risk as part of its due diligence? For example, a tax or intellectual property risk (including any issues which could impact the value attributable to the target’s brand).
Have significant asset-level vulnerabilities to physical climate risk been assessed and any identified vulnerabilities been addressed?
Have the practical and cultural implications of integrating the target’s people into the buyer’s business been factored into transaction pricing and planning?

Divestment risks for sellers

It is important to ensure that targets are ‘sale ready’ when considering divestments. This will support an efficient sale process, mitigate risks, and help to protect value.

The proceeds from selling all or part of a company can be used to invest capital into the remaining business, finance a future acquisition, or realise cash for retirement purposes. However, the seller’s ability to use the sale proceeds as they had planned can be impacted by a number of factors, including:

Not achieving the best price for the business as a result of potential red flag issues and/or lack of good quality and robust information.
Retaining residual liability for warranties and indemnities given to the buyer, plus the need to potentially place funds in an escrow account.
Unforeseen or unquantified related separation costs being retained by the seller.

When contemplating a divestment, sellers should ask key risk and insurance questions including:

Are there any red flags that may result in purchase price adjustments or bidders walking away from the transaction?
Is target-specific exposure information — including ground-up loss experience — available to enable potential buyers to bid with confidence?
Has warranty and indemnity insurance or specific risk insurance been considered to exit the sale with minimal post-closing liability?
Does the SPA reflect the seller’s strategy for dealing with historic liabilities?
Have potential issues arising from separating the target workforce from the existing business been carefully addressed?

Next steps

Failing to address the risks associated with an acquisition or a divestment can be costly and can threaten any value derived from transactions. Getting it right, particularly in the current market, is essential. To discuss any of the key risks noted above, please contact your Marsh adviser.

Article

M&A deal risks across the retail, food and beverage sectors

Acquisition risks for buyers

Divestment risks for sellers

Meet the authors

Kelvyn Sampson

Suzanne Jones