Purchase or Sale of a Business
When you know it is time to sell or buy a business, you need a small team of highly experienced professionals on your side.
We have accounting expertise as CPAs and a wealth of business valuation experience.
Cogence Group’s advice is informed by decades of experience in contentious litigation matters arising out of business transactions gone wrong. Learning from these matters, we can help you avoid expensive litigation.
We’ve observed that there are three common issues that cause post-transaction disputes:
Misleading or inaccurate financial information
Ambiguous post-close terms
Earn-out payments
Seller’s Financial Information
If you are thinking about selling your business, it is important to first get your financials in order. A business isn’t ready to be sold until it’s dressed for the party. That means cleaning up your books and financial statements.
Potential buyers will assess the worth of your business based on reported earnings, not your representations of what the company “should earn” in the hands of the new owner. Adjusting your financials to reflect true market wages and rent will give the potential buyer an accurate picture of the business. Identifying reasons for one-time anomalies can explain less profitable periods and increase the price a buyer is willing to pay.
A detailed review of your financials before you start a transition will also avoid surprises when the buyer gains control of the books and assets. Inaccurate or misleading financials is a major source of post-deal litigation. To learn more about this important step, read our blog post: Clean Up Financial Statements before Searching for a Buyer.
Imprecise or Ambiguous Post-Close Terms
Many cases are fought over post-close working capital adjustments that are governed by ambiguous terms. A recent case involved the sale and purchase of selected current assets and current liabilities, defined as net working capital.
The parties were fighting about the value of inventory transferred. The seller’s inventory included finished goods, purchased goods, and bulk unprocessed product. The asset purchase agreement called for the bulk unprocessed product to be valued under “net realizable value.” Unfortunately, it became abundantly clear during the litigation that the parties should have carefully defined what inputs were to be included in determining net realizable value and how the inputs were to be determined. The parties’ differing inputs resulted in millions of dollars of differences. To learn more about this case, and another, read our blog post: True-Up Pitfalls of the Asset Purchase Agreement.
All-or-Nothing Post-Close Earn Outs
In a lot of scenarios, an earn-out provision makes sense for the buyer and the seller.
The buyer reduces their risk of paying a high price for a business that quickly falls apart after a poor transition.
The seller enjoys upside of receiving a higher price than they would have received because risk is lessened, and they can share in the benefit of a better-than-expected transition.
In a recent case, we were involved in an earn-out dispute over a $1 million payment. If the business had over $10 million in sales that year, the sellers would receive $1 million. If the business had $9,999,999 in sales or less, the sellers received nothing. Of course, sales were approximately $10 million, and each side argued it should either be slightly above or below the threshold.
If the parties had structured their earn-out payments with gradual percentage increases or a flat percentage rate, this litigation could have been avoided.
Are you getting ready to sell your business or buy another business? Count on experience you can trust.