Post-acquisition disputes can significantly impact the success of a transaction and the ongoing success of the businesses involved.
Working in our respective areas of expertise of corporate finance and forensic accounting, we have observed several recurring issues that can lead to disputes. This article draws on our respective experience provide practical insights into common post-acquisition dispute issues and how to address them proactively, particularly through the financial due diligence and deal advisory process.
The transaction environment
Post-acquisition disputes often arise from the prevailing complexities and pressures of the transaction environment at the time they are negotiated. Key current drivers include:
- Time pressure and haste: the urgency to close deals can lead to oversights and ambiguities in transaction documents. During periods of high market activity such as the COVID-19 deal boom, the fear of missing out can drive hurried decisions, increasing risk of matters not being identified or fully considered.
- Market volatility: rapid changes in market conditions post-acquisition can alter the perceived value of the deal. This volatility can lead to buyer's regret.
- Ambiguity in agreements: a lack of clarity in accounting, financial terms, and concepts in Sale and Purchase Agreements (SPAs) creates a fertile ground for dispute. Ambiguous terms and definitions can lead to differing interpretations and expectations.
- Insured transactions: the rise of warranty and indemnity insurance has created a framework to pursue disputes more readily.
Common themes in post-acquisition disputes
We have identified four common themes that frequently lead to disputes:
1. Accounting standards and policies
- Misalignment in applying accounting standards to transactions can lead to significant disagreements. For example, differing interpretations of inventory valuation methods can result in disputes over purchase price adjustments.
- A recent example is a dispute over a fuel stock valuation. The purchaser and vendor had conflicting views on whether to use cost or net realisable value based on accounting policies as defined in the SPA.
2. EBIT and EBITDA calculations
- The lack of standard definitions for EBIT and EBITDA in the accounting standards can cause confusion. Issues often arise around whether certain items, such as government grants or rebates, should be included in these calculations.
- Recently, the inclusion of JobKeeper payments or supplier rebates in EBITDA calculations has impacted the calculation of earn-out amounts or other deferred consideration.
3. Working capital and price adjustments
- Disputes frequently occur over the calculation of working capital and price adjustments. These calculations involve numerous inputs and interpretations, making them a common source of contention. Common issues include disagreements over prepayments to suppliers, Pay As You Go Withholding (PAYGW) payables, and the financial impact of commercial agreements.
4. Deal construction and warranty claims
- The structure of the deal itself can also impact the ability to make claims. For instance, warranty claims related to inventory valuation can hinge on how the deal was constructed and the clarity of the SPA. A notable example is a transaction where the purchaser claimed a significant loss due to alleged misrepresentation of inventory value, impacting the overall purchase price.
Using financial due diligence as the ultimate mitigation strategy
A strong and robust financial due diligence process mitigates the risks associated with potential issues.
- Proactive due diligence: conduct thorough Financial Due Diligence (FDD) to identify areas of potential dispute before they arise. This includes understanding the commercial realities of the business and how they impact financial inputs. Engaging an FDD professional early in the deal ensures that FDD is targeted and aligned to investigate areas of key risk, within time and budgetary constraints.
- Clear documentation: ensure that all terms and definitions in the SPA are clearly documented, understood and agreed upon by both parties. This includes specifying accounting policies and methodologies, rather than relying on standard ambiguous wording regarding the application of Australian Accounting Standards. For example, explicitly defining how annual leave should be calculated and recorded can prevent disputes over employee benefit liabilities.
- Worked examples: include worked examples in the SPA to illustrate how calculations should be performed. This helps to align expectations and reduce ambiguity. For instance, providing a proforma calculation for working capital adjustments can clarify how different items should be treated.
- Engage experts early: involve forensic and corporate finance experts early in the transaction process to identify and address potential issues before they become disputes. Their expertise can help navigate complex accounting and financial issues, ensuring that all parties have a clear understanding of the terms and conditions.
Post-acquisition disputes are a significant risk in any transaction, but with careful planning and proactive due diligence process these risks can be mitigated. By understanding the common and sometimes ‘little’ issues and how they can become bigger issues, businesses can minimise the occurrence of post-acquisition disputes.
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