Once upon a time in a land far, far away a buyer and seller came together, and quickly came to terms that everyone was happy with. Post-closing the business thrived, and the seller went on to an extraordinary retirement. They all lived happily ever after. Did I mention that what was sold was a certain bridge in Manhattan?
Deals are consummated for all kinds of reasons. Every deal starts with a willing buyer and a willing seller, both attempting to maximize their value, search for the best possible terms, protect their exposure to bad things, and seek to understand where the business has been and where it can go, a true kumbaya moment. Unfortunately, not all deals have a happy ending.
A dispute between the parties typically occurs because one party’s understanding (real or perceived) of what appeared to be the deal at the closing table turned out to be different. These disagreements can become a lengthy, and expensive litigation between the parties; moreover, the new owner of the business is focused on the litigation and not on running the business.
Normally the deal price is in part based on assumptions and estimates, projections of perceived value and opportunity. Accounting concepts which require judgement, accruals, reserves, timing of recognition and provisions are all typical subjects of disagreements. Many of which in the euphoria of the deal (read big payday) get insufficient attention by one side or the other. The result is the closing becomes just a step in negotiating the deal.
Let the Negotiations Begin
An asset purchase agreement often includes a designated period of time, post-closing, after which the assumptions and estimates included on the seller’s closing balance sheet will be adjusted for the impact of the settlement period activity. A final purchase price will be calculated by adjusting the values on the closing balance sheet for post-closing activity and any working capital adjustments.
It is not uncommon for these computations and/or for certain assumptions and estimates to remain unresolved after this period because the underlying transaction(s) have not settled out. Therein lies the genesis of the disputes.
It is also possible that some of the representations made during the due diligence process, and memorialized in the contracts did not materialize, or ultimately proved to be wrong. As a result, the buyer may an attempt to adjust the purchase price to reflect the loss of the perceived value.
Caveat emptor is not a thing when it comes to deal structure. The due diligence process is only effective if the buyer receives comprehensive and accurate information and makes a thorough analysis. Even then there may still be unresolved questions.
Moreover, a failure to communicate whether intended or not, can also result in disagreements over what the buyer thought they were acquiring and what the seller thought they were giving up.
Over the next several installments, we’ll look at some areas where disputes often arise. We’ll discuss what can be done to anticipate the issues and the steps that can be taken pre- and post-closing to minimize the damages.
For more information on this topic, please contact a member of Withum’s Forensic and Valuation Services Team.