ABF Journal recently reported on a surge in middle-market M&A disputes, with working capital adjustments, quality of earnings disagreements, and earnout conflicts driving the bulk of post-close litigation. None of that is surprising to anyone who has sat at a closing table and watched two parties realize they had fundamentally different assumptions baked into the same purchase agreement. What is surprising is how preventable most of it is.

At Pyek Financial, we work on both sides of the table — buy-side and sell-side — across a range of industries. The disputes we see aren't random. They cluster around the same five failure points, every time. Knowing where they are isn't enough; you have to build process around them before the LOI is signed, not after the deal closes.

Working Capital Disputes Are the Most Common Post-Close Fight — And the Most Avoidable

Working capital adjustments are the single largest source of post-close M&A disputes in the lower middle market. The mechanism is straightforward: the purchase agreement sets a target working capital peg, and the parties settle up based on the actual working capital at close. The problem is that "working capital" sounds simple and isn't.

What counts as current? How are intercompany payables treated? Are deferred revenue and customer deposits included? Does the seller's historical accounting for inventory match what the buyer's auditors will say at close? Every one of those questions is an ambiguity that a motivated party can turn into a dispute.

The fix is to define working capital in exhaustive detail — at the LOI stage, not during final negotiation. Include an illustrative working capital schedule in the purchase agreement as an exhibit. Walk through the methodology line by line with both finance teams before signing. This is not glamorous work. It is, however, the work that prevents a $300,000 escrow fight eighteen months after close.

Why Quality of Earnings Reports Miss Things That Should Have Been Caught

A quality of earnings (QoE) report is not an audit. Most buyers understand this intellectually and then treat the QoE conclusion as if it were. That gap creates real exposure.

A QoE focuses on the sustainability and accuracy of reported EBITDA. A good one will identify add-backs that don't hold up, revenue that won't recur, and accounting policies that inflate earnings. A bad one — or a rushed one — will miss customer concentration risk buried in revenue detail, accelerated revenue recognition on long-term contracts, and one-time gains dressed up as recurring income.

The standard in the lower middle market is a sell-side QoE prepared by the seller's advisor, reviewed by the buyer. That creates an inherent tension. Buyers who rely solely on a seller-prepared QoE without independent review are taking on risk they're not pricing. At minimum, the buyer's financial advisor should be running independent EBITDA bridge analysis, not just reviewing the seller's version. The difference in cost between a thorough independent review and a rubber stamp is trivial compared to a disputed $1.2M EBITDA adjustment post-close.

Pyek Perspective

The QoE disputes we've seen come from two places: sellers who genuinely didn't know their numbers were structured to mislead, and sellers who absolutely did. The diligence process is the same for both. You build a parallel model from source documents, not from the seller's adjustments, and you reconcile from there. The discrepancies tell you which category you're dealing with.

Earnout Structures Are Where Good Intentions Go to Die

Earnouts are supposed to bridge valuation gaps. A seller who believes the business will grow faster than the buyer is willing to price gets a chance to earn that premium if the growth materializes. Clean in theory.

In practice, earnouts create a second negotiation after close — one that happens without a neutral party facilitating it, and where one side controls the information. The buyer controls the books post-close. The seller is watching the numbers from the outside. When the earnout underperforms, the dispute is almost always about whether the buyer managed the business in a way that intentionally or incidentally suppressed the earnout metric.

Three rules for earnouts that actually work:

Skipping any of these is how a seller ends up with a $750,000 earnout that was never going to pay out the day the ink dried.

How Misrepresented Seller Financials Become a Buyer's Legal Problem

Representations and warranties in a purchase agreement cover a lot of ground — intellectual property, litigation, employment matters, environmental compliance. Financial reps are the ones that actually get triggered.

Common financial misrepresentations in lower-middle-market deals aren't usually outright fraud. They tend to be aggressive accounting that the seller's CPA allowed to slide: revenue recognized before delivery, expenses capitalized that should have been expensed, related-party transactions at non-arm's-length pricing, or receivables that were uncollectible and everyone knew it. None of those appear on the face of a clean tax return.

Representations and warranties insurance (RWI) has grown significantly in middle-market transactions as a mechanism to shift this risk to an insurer rather than leaving it between buyer and seller. Buyers should understand that RWI carriers conduct their own underwriting review, and a deal with weak diligence documentation will face exclusions that eliminate most of the coverage that matters. Strong diligence is not just good practice — it's what makes the insurance work.

The Diligence Checklist That Most Sellers Never See

Sellers consistently underestimate how much the quality of their own financial records affects deal value and deal speed. Buyers price messy books. Not explicitly, but through the process: more diligence time means more deal fatigue, more re-trades on price, and more conditions to close.

A $20M manufacturing business with clean, well-structured financials and a clear chart of accounts closes faster, at a better multiple, with fewer post-close disputes than an identical business whose books are two years behind on reconciliations. This is not hypothetical.

Sellers preparing for a transaction should have, at minimum:

None of this is complex. All of it is consistently missing in lower-middle-market sell-side processes, and every gap is a negotiation point the buyer will use.

Our transaction support services are built around exactly this kind of sell-side preparation — getting the financial story in order before the data room opens, not after the buyer's team has already formed a negative impression.

You Don't Have to Wait for the Dispute to Fix This

The surge in middle-market M&A disputes isn't a mystery. It's the predictable result of deals getting done with incomplete diligence, poorly structured agreements, and no one in the room whose job is to find the problems before they become someone else's leverage.

Pyek Financial works with buyers and sellers across industries to build the financial infrastructure that prevents these disputes from forming in the first place. Whether you're twelve months from a sale or actively in a process right now, the work is the same: know your numbers, structure the deal correctly, and don't hand the other side a free argument.

If you're heading into a transaction and want a second set of eyes on your financial position before the data room opens, let's talk.