{"id":4000,"date":"2018-02-15T17:37:22","date_gmt":"2018-02-16T00:37:22","guid":{"rendered":"http:\/\/celebrated-metal.flywheelsites.com\/?p=4000"},"modified":"2018-03-13T18:43:34","modified_gmt":"2018-03-14T01:43:34","slug":"settling-preventing-post-acquisition-disputes","status":"publish","type":"post","link":"https:\/\/analyticbusinessappraisers.com\/settling-preventing-post-acquisition-disputes\/","title":{"rendered":"Settling (and Preventing) Post Acquisition Disputes"},"content":{"rendered":"

Abstract: \u00a0<\/b>\u00a0Mergers and acquisitions sometimes fail to live up to the parties\u2019 expectations for a variety of reasons. This article illustrates how financial experts can help buyers and sellers resolve disputes that arise after a deal closes and, more important, how they may help <\/span>prevent<\/span><\/i> disputes if consulted before closing about value-related provisions of the sales contract. <\/span><\/p>\n

Settling (and preventing) post acquisition disputes<\/b><\/p>\n

Mergers and acquisitions sometimes fail. Why? Sometimes the buyer simply forecasts unrealistic synergies between the merged companies. In other cases, the seller misrepresents the company\u2019s closing-date financial condition and historical earnings capacity. Or, the seller might not receive as much in contingent consideration as expected because the buyer mismanaged the company or understated postacquisition financial results. <\/span><\/p>\n

A financial expert can help the parties identify the reason a deal failed and evaluate whether it\u2019s related to wrongdoing by another party. In addition, an expert, if hired early in the M&A process, can help the parties <\/span>prevent<\/span><\/i> postacquisition disputes. <\/span><\/p>\n

Avoid unpleasant surprises<\/b><\/p>\n

When privately held businesses are bought and sold, the parties typically withhold a portion of the payout or hold funds in an escrow account until certain financial matters can be resolved. For example, the deal may include an earnout where a portion of the sales proceeds are contingent on the acquired entity meeting certain financial benchmarks in the future. <\/span><\/p>\n

Alternatively, to avoid unpleasant surprises after the transaction closes, a deal may call for purchase price adjustments (PPAs) to reconcile any disparities between what the seller represented in preliminary \u201creference\u201d financial statements and the company\u2019s actual results. For example, if the seller\u2019s working capital has increased or decreased between the time of the reference financials and the closing date, the purchase price would be adjusted upward or downward on a dollar-for-dollar basis. In such cases, when a buyer discovers facts that the seller failed to disclose, the buyer may claim that the business isn\u2019t as valuable as the seller represented it to be when the parties negotiated the purchase price. <\/span><\/p>\n

Buyer vs. seller<\/b><\/p>\n

Let\u2019s take an example. A seller loses a major contract shortly before the acquisition but doesn\u2019t disclose this fact to the buyer. The buyer might seek damages based on a revaluation of the target in light of this new information. <\/span><\/p>\n

This is where a financial expert\u2019s business valuation skills are critical. The buyer\u2019s expert might testify that the loss of the contract had a material negative impact on the seller\u2019s value and calculate damages based on the alleged diminution in value. <\/span><\/p>\n

The seller\u2019s expert could counter that, based on the target\u2019s forecasts and other evidence, loss of the contract isn\u2019t expected to hurt its future financial performance or market value. Perhaps this type of customer turnover is an ordinary part of the seller\u2019s business. Perhaps the seller was in the process of negotiating new contracts that would replace the lost revenues.<\/span><\/p>\n

Another important consideration is the materiality of an alleged misrepresentation. The buyer may argue that it would have paid less for the business had it known about the lost contract. But from the seller\u2019s perspective, the loss may have had no impact on the price it was willing to accept.<\/span><\/p>\n

In some cases, the seller\u2019s actual performance may be relevant. If subsequent events demonstrate that the seller\u2019s postclosing performance was consistent with the buyer\u2019s expectations at the time the transaction was negotiated, the seller might argue that the buyer still benefited from the deal.<\/span><\/p>\n

An ounce of prevention<\/b><\/p>\n

Too often financial experts aren\u2019t consulted until <\/span>after<\/span><\/i> an M&A deal closes. But their expertise can be essential when drafting PPA or earnout provisions. In particular, when drafting sales contracts, attorneys should consider addressing the following financial issues:<\/span><\/p>\n