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Providing financial and accounting insight for M&A disputes
Due to a favorable mixture of low interest rates, high levels of investable cash and a shortage of quality sellers, the mergers and acquisitions deal market continues to be very competitive. But in the rush to grab opportunities when they arise, buyers and sellers often execute purchase agreements that fail to anticipate foreseeable business operational issues, do not fully define or describe key accounting concepts, or simply miss the details altogether. These oversights and omissions can create time-consuming headaches and can result in significant adjustments to the negotiated purchase price, and in the worst cases they can lead to expensive and prolonged litigation.
When accounting and financial-related post-acquisition disputes arise, RSM’s forensic and technical accountants can help you successfully resolve the situation, whether you require a financial expert to support your position or for RSM to act as a neutral independent accountant. Our team has the skills and experience to quickly assess the core causes of the dispute, and has the experience and know-how to approach these contested matters. As every transaction is uniquely negotiated, the facts and circumstances causing a post-acquisition dispute can be driven by a variety of issues. However, we find that financial and accounting post-acquisition disputes generally center on the following issues:
- Working capital. Working capital provisions in purchase agreements identify the short-term net assets that are needed to operate the business after the transaction has closed. While it is standard practice to estimate a working capital target during deal negotiation, many purchase agreements do not fully explain how the measure is to be calculated in practice, how any adjustments will be recorded, or what data will be maintained and shared by the parties. Often they do not provide clear guidance on the rules of accounting that shall be followed. If those gaps are not addressed before the deal is signed, they can fuel a time-consuming working capital dispute.
- Earnouts. An earnout provision generally means a seller can receive additional compensation, provided that the company achieves certain financial or operational performance targets in a specified time frame. This provision is often used to bridge disagreements regarding the value of a business, where a seller concedes cash at the time of closing for the opportunity to earn additional cash payments over time. In practice, earnout measurements are often inadequately defined, and purchase agreements do not include sufficiently detailed examples of the measurement process. These deficiencies often materialize into disputes.
- Representations and warranties. In essence, representations and warranties are intended to be factual disclosures about the seller’s financial and operating condition. Typically, buyers rely on this detail when evaluating a prospective deal. When these financial or operational disclosures are found to be misrepresented, disputes can occur. Common causes of representation and warranty disputes include: what the parties knew prior to the transaction, the identification and condition of material contracts and material customers, the buyer’s reliance on financial statements and accounting information specifically identified in the deal document, and undisclosed or contingent liabilities that were known by the seller before the transaction was completed.
Even under the best circumstances, difficult issues can arise after the close of an otherwise good business deal. RSM’s dispute advisory team can evaluate and help resolve the financial and accounting aspects of your M&A dispute.
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