Article
Transaction advisory: Dispute causes and how an independent accountant can help
Feb. 23, 2022 · Authored by Luc Arsenault
Low interest rates, buyers sitting on record levels of investable cash, and a shortage of sellers are key factors driving one of the most competitive mergers and acquisitions (M&A) markets in recent history.
In the rush to pursue opportunities as they arise, key details are often left out of the purchase-agreement terms. This can result in expensive litigation when the parties discover unpleasant surprises after signing the agreements.
The following is an exploration of common M&A transaction discrepancies, considerations to improve your purchase agreement, and how an independent accountant can help companies resolve these issues.
M&A strategy closing adjustments trends
Parties are spending more time and attention on defining closing adjustments to limit the latitude buyers and sellers have when devising post-closing calculations.
Typically, most M&A transactions are based on the company being delivered with the following criteria:
- On a cash-free, debt-free basis
- With a normal level of net working capital (NWC) needed to operate the business without additional contribution
- With each party paying their own transaction expenses, such as advisor fees, brokers’ commissions, or spreads
At times, parties use earn-out provisions — a contractual agreement to pay some or all the purchase price if certain milestones are achieved post-close — to bridge the valuation gap. As such, parties could potentially need to reconcile five or more accounts and items after the transaction.
The cash, debt, and transaction expense components of the M&A process are typically easier to reconcile. NWC calculations and earn-out provisions, however, require more definitions and precision due to the number of accounts included in their determination.
To address these potential complications, parties can define NWC and the earn-out provision, including a sample calculation, in the purchase agreement.
Common causes of M&A process closing adjustment disputes
The causes of a dispute can vary between NWC closing adjustments and earn-out provisions. These examples show how a lack of specificity can lead to M&A strategy confusion.
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