Avoiding costly post-acquisition disputes over portfolio companies
In the current environment, where historically low interest rates have enabled access to abundant capital, high-performing companies are attracting significant interest from private equity (PE) firms. Increased demand and competition for assets in the marketplace has led to historically higher valuations, purchase prices and purchase multiples.
Understandably, PE firms expect significant returns from investments made in portfolio companies. However, amid an uncertain and uneven economy, portfolio companies sometimes do not meet the increased expectations PE management had in mind, and expected, leading up to the acquisition. As a result, many PE firms are exploring how and why acquisitions have not produced the expected level of cash flow and profitability. This has led to scrutiny of contract terms, financial projections, and post-closing adjustments and calculations.
In some cases, disagreements can be quickly resolved with a compromise reached between the buyer and seller. However, in other situations, disagreements may be too significant to be worked out directly, leading to disputes or litigation.
Disagreements can occur relating to a host of financial and accounting reasons, including:
- Complex, confusing and complicated purchase agreements
- Vague or ambiguous definitions and computation formulas within deal documents
- Multiple and sometimes contradicting data sources for calculations
- Midperiod closing dates that lead to confusion for cutoff dates
- Incomplete or inaccurate information provided during due diligence that requires significant adjustments
Due to the aforementioned items, and others, the analysis required to complete post-closing calculations can be complex. But there are certain areas, and steps, to keep in mind that could work to lessen the likelihood of post-acquisition disputes.
Read a recent article published by The Journal of Corporate Renewal with RSM US LLP’s Patrick Chylinski and John Tira to understand how PE firms can potentially reduce the occurrence or impact of post-closing disputes.