1) Transaction disputes:
Extract more value
Bryan Moser, Partner, Forensic and Valuation Services
Over $1.1 trillion in U.S. and $2.4 trillion in global M&A deals have been
signed this year through August — the highest year-to-date volume since 2007.1
With the growing M&A market, business owners
are finding opportunities for investment. But not all
transactions realize anticipated value, which can lead
to post-acquisition disputes. Some disputes relate to
provisions for future payouts based on performance.
Other disputes relate to the accounting for certain
elements in the closing balance sheet. Companies may
even dispute over the determination of seemingly simple
calculations, such as the change in working capital
between a preliminary closing and final balance sheet.
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Disputes are typically argued before a judge with legal
training and experience. However, many transaction
agreements provide for disputes to be resolved by
an accounting expert; a benefit being that a neutral
accountant will likely have more financial experience
than a judge. When the parties are preparing
information to present to a neutral accountant, they
must remember that it is still critical to present the
facts and analysis in a clear and compelling manner.
Don’t be tempted to assume that less explanation of
the financial and accounting facts and arguments is
acceptable when presenting information to a neutral
accountant instead of a judge. Parties should have a
thoroughly prepared analysis and clearly articulated
arguments to achieve the best results.
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maïzo, Quincy. “US Targeted Advised M&A Activity at Highest YTD Level Since 2008,” Dealogic M&A Statshot, Aug. 19, 2014.
See www.dealogic.com/media/market-insights/ma-statshot/ for more information.
2) Transaction disputes: Extract more value
6 actions to tip the scales in your favor
Avoid leaving the neutral accountant unarmed to
make the best decision. Here are six actions to help
avoid such situations.
1. Outline the dispute process in the
transaction agreement
The best way to minimize risk in disputes is to avoid
them to start with. A clearly written transaction
agreement can help avoid disputes. For example, state
whether adjustments to working capital are based on
the change in working capital between two points in
time or if corrections to the final account balances are
allowed to adjust for prior accounting errors.
Pre-defined provisions related to the neutral
accountant will streamline the dispute process. Ideally,
the transaction agreement will outline the process
in detail. If it does not, the parties should define the
process as soon as possible when a dispute arises. The
format may range from very simple to somewhat
complex. A simple process may include an initial
submission from each party, a rebuttal from each
party, the neutral accountant’s questions and requests
for documentation, and the neutral accountant’s
decision. In some circumstances, parties may include a
surrebuttal round of submissions, a hearing with oral
arguments and witness testimony, and a final round of
written submissions containing concluding arguments
from each party.
It is important to balance the benefits of a more timely
resolution (including lower costs and quicker access
to cash) against the risks of accelerating the process
(including the presentation of fewer facts, a less robust
analysis and less persuasive arguments to the neutral
accountant). When agreeing upon a timeline, opposing
parties must factor in time for the neutral accountant
to make the final determination. Since it is impossible
to predict the number and complexity of issues that
may be disputed, be prepared to adjust the schedule
in the transaction agreement, based on discussions
between the parties and the neutral accountant.
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2. Agree to disagree (i.e., agree on what is disputed)
Clearly define disputed items. The parties should
prepare an easy-to-understand list of the issues and
associated amounts (including the total amount)
in dispute. The amounts should link directly to
the ultimate determination, which in turn should
link directly to the transaction price and dispute
resolution language in the transaction agreement.
While that concept is simple, its execution can fall
by the wayside. Failing to distinctly outline the
items and amounts in dispute can lead to additional
disputes during the course of the proceeding, causing
delays in the decision and incurring more time
and cost by the neutral accountant, advisors and
disputing parties. Before starting work, the neutral
accountant should be engaged by a letter that lists the
issues and amounts in dispute as agreed upon by all
parties. Another simple but valuable tip is to agree
on a consistent numbering of issues and amounts
in dispute. This approach can save time and reduce
confusion throughout the process.
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3) Transaction disputes: Extract more value
3. Choose between consistency and GAAP
4. Address common accounting issues
Disputes sometimes arise regarding whether to apply
consistency of accounting method or GAAP when
calculating post-closing adjustments. This is especially
relevant when calculating working capital adjustments
that may be intended only to measure the change in
working capital from one period to another, typically
from the preliminary closing balance sheet date to the
final balance sheet date. The transaction agreement
may specify whether the post-closing adjustment
contemplates adjustments to the preliminary closing
balance sheet only, the final balance sheet only, or
both. If the intent is truly to measure the change in
working capital, a proposed adjustment to one balance
sheet as a result of correctly applying GAAP would
generally apply to the other balance sheet as well. If
the intent is to adjust the final balance sheet to GAAP,
as opposed to measuring a change in working capital,
the determination of how to correctly apply GAAP
is especially critical. In the transaction agreement,
parties should clarify their intent with respect to
accounting methods. If the transaction agreement is
unclear, its language will have to be assessed by the
neutral accountant. A neutral accountant may request
email correspondence and prior drafts of transaction
agreements from each party in an attempt to discern
the intent of the parties.
Common disagreements arise around inventory and
accounts receivable:
Regardless of that intent, GAAP should be applied
consistently. For example, multiple methodologies
exist for calculating reserves for inventory or accounts
receivable that are in accordance with GAAP.
However, consistent application of GAAP would
mean using the same method of calculating a reserve in
the final balance sheet as was used in the preliminary
closing balance sheet.
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• Parties often disagree about the value of inventory
as recorded on the balance sheet. The nature of
inventory accounting presents challenges for
parties seeking to demonstrate whether inventory
is obsolete or will be used in the continuing
operations of the business. Disagreements
sometimes arise when the buyer asserts that
inventory is not valuable to the new entity.
Upfront discussions between the parties during
due diligence can minimize arguments during the
dispute resolution process. The neutral accountant
will likely seek compelling information that
demonstrates whether inventory on the books
during the due diligence process has value to the
buyer. Be wary of attempting to argue that the
inventory is not valuable to the buyer because
the buyer has different plans for the business.
A neutral accountant may not hold the seller
responsible for inventory write-offs resulting from
the buyer subsequently making unanticipated
changes to the business plan.
• Determining the expected dollar value and
collection percentage of accounts receivable can
also present challenges for a new owner. Some
deals exclude some or all accounts receivable
for that very reason. If accounts receivable are
included in the transaction, carefully consider
the factors affecting the amounts at which those
accounts are recorded on the balance sheet. As
a seller, do not overlook or dismiss the fact that
certain accounts receivable have aged. Failure to
acknowledge aging accounts or any collection
difficulties may shed a negative light on your
position and raise doubt in the mind of the neutral
accountant. Address any collection issues directly
while also providing objective support for the
accounts receivable balance net of reserves. Buyers
and sellers should consider specific historical
experience related to accounts receivable and
review any correspondence related to significant
individual accounts; this correspondence may help
the neutral accountant make a decision.
4) Transaction disputes: Extract more value
When assessing these issues, consider what
information was known — or should have been
known — when the balance sheet was prepared.
Differences can occur when the parties base their
arguments on information known at different times.
Unless these issues have been agreed upon, the
neutral accountant will likely base the decision on
what would have been known to the parties as of
the date the balance sheet was prepared, consistent
with GAAP. However, the neutral accountant
may consider the behavior of the parties in their
collection efforts undertaken both before and after the
transaction date. For example, documentation that the
buyer did not attempt to collect receivables will make
it more difficult for the buyer to obtain a favorable
decision in this area.
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5. Document analyses thoroughly
6. Review your report and exhibits adequately
If the neutral accountant cannot easily follow the
supporting documentation, he or she is less likely to
adopt your position. For complex analyses, consider
a reference system to facilitate the understanding of
complicated schedules. Clear referencing of values and
the flow of calculations increases the efficiency of the
neutral accountant’s decision-making and increases
your persuasiveness.
Consider additional assessments of your material for a
different perspective:
The absence of documentation creates difficulties for
the neutral accountant. Inconsistencies within the
historical accounting records can reflect poorly on
the seller. If disputed issues were not discussed during
due diligence, the neutral accountant may wonder
why. Lacking other detailed and persuasive analysis,
the neutral accountant may decide to give audited
financial statements the highest possible weight when
assessing each position’s relative strengths. Don’t leave
the neutral accountant guessing about why accounting
records may be missing.
Prepare a clearly stated and supported analysis that
provides reasons and documentation. Even if you
believe your point is obvious, emphasize relevant facts
and strong logic.
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• Enlist someone unfamiliar with the situation to
review the materials; this can highlight areas that
are not clear to someone who is new to the facts
and analysis.
• ave a nonfinancial person read the financial
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analysis as a sanity check. Lawyers involved in
such disputes are very familiar with accounting
analysis and quite effective in presenting
arguments. They are well-suited to provide an
objective review of the analysis and presentation.
• few extra hours of time by an outside attorney
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or another person in management can pay valuable
dividends in the end. Have someone else listen to a
description of the other party’s position compared
to your position and tell you what resonates with
them and what does not. It may help you focus
your analysis more effectively.
5) Transaction disputes: Extract more value
Conclusion
Don’t make the neutral accountant “work for it.” Be
helpful to the neutral accountant, who you should
expect wants to arrive at the best answer. If the neutral
accountant must make multiple requests to obtain
information that could have been easily provided
at the outset, he or she may begin to question
the position or even the veracity of the responses
more broadly. Be proactive before coming to the
neutral accountant. Discuss the parties’ respective
understanding of facts and assumptions before you
bring issues to the neutral accountant to avoid wasting
time and money.
With the anticipated increase in transaction activity,
the potential for post-acquisition disputes also
increases. By following these suggestions, parties can
save themselves some aggravation during the dispute
resolution process and maximize the likelihood of a
favorable result. These steps can:
• Help you minimize the number of issues that must
be presented to a neutral accountant (when you
apply these principles early in the dispute process)
• ncrease the probability that you can persuade the
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neutral accountant to agree with your point of view
• educe the costs incurred in terms of hours spent
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by employees of each party, lawyers, outside
accountants or other financial professionals and
the neutral accountant
• esult in each party feeling more satisfied about
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the dispute resolution process and, ultimately,
about the underlying transaction
Planning your approach actively and in advance can
result in a more cost-effective dispute resolution
process and a higher probability of realizing more
value from a transaction.
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Case study
In my experience as a neutral accountant, I have seen
submissions that varied in degrees of professionalism
and persuasiveness; this example highlights how those
differences have an impact.
One party presented submissions in a format similar to
typical court pleadings. The party clearly supported its
position with specific and logical statements that linked
and referenced the financial documents.
The other party provided a series of bullet points in an
email. In addition to this detracting format, the structure
of the presentation did not clearly demonstrate how all
assertions and calculations related to the underlying
documentation. I was required to figure that out on
my own. This resulted in additional time spent by our
team, asking clarifying questions of that party. Also,
a curious aspect of the party’s supporting narrative
was the failure to address, or even acknowledge,
facts that clearly supported the opposing viewpoint.
Not addressing such obvious information caused me
to question whether all of the relevant information
had been presented — or even if the party may be
simply ignoring facts in hopes that I would overlook the
information. Neither of these is a good result.
In this case, the party that presented the clearest and
most organized narrative and supporting materials was
awarded approximately 90% of the aggregate amount
it sought. While the determination was ultimately based
on the relative strengths and weaknesses of the facts
underlying each position, the manner in which the
materials were presented certainly affected the decisionmaking process and associated time and costs.
Contact
Bryan Moser
Partner, Forensic and
Valuation Services
T +1 703 847 7586
E bryan.moser@us.gt.com
6) Content in this publication is not intended to answer specific questions or suggest suitability of action in a particular case. For additional information about the issues
discussed, consult a Grant Thornton LLP client service partner or another qualified professional.
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