Page 62 - M & A Disputes

If the disputed adjustment amount relates to ordinary expenses, such as payroll or inventory reserves that
were reflected in the interim financial statements (and are expected to continue in the future), there may
be an impact on the target’s future earnings and, therefore, the buyer’s valuation.

The buyer should be able to prove the effect of the disputed adjustment amounts on future periods. The
primary question that should be asked and evaluated is, Has the buyer’s business been damaged into the
future? The measurement of damages into future periods is predicated on assessing the following issues:

a. The misstatement will affect future periods.

b. The buyer’s expectations were based on future performance.

c. The business was significantly devalued after the acquisition.

d. The misstatement would be material to a willing buyer.

Key Considerations in Assessing Damage Amounts Under Indemnity Claims

If the buyer alleges that its disputed adjustment amount has affected the target’s future cash flow, sever-
al factors should be considered and evaluated by the practitioner:

 The practitioner should evaluate what was known by the buyer and seller prior to the closing date
of the acquisition.

 It is important for the practitioner to understand and analyze what the parties knew or should
have known prior to the acquisition. The practitioner should gain access to information and doc-
umentation reviewed by both the buyer and seller prior to the transaction. Most often, the buyer
will engage a third-party firm to assist in conducting due diligence efforts. The practitioner
should obtain any and all information viewed by this third party in preparing its due diligence re-
port for the buyer. Additionally, the practitioner should review any other information, including
e-mails, memorandums, and letters exchanged between the parties prior to closing.

 The practitioner should evaluate whether the buyer’s preacquisition financial analysis of the tar-
get company was impacted.

As previously discussed, unless the disputed adjustment amount was inappropriately included or exclud-
ed from the target’s financials used by the buyer in determining the purchase price, the buyer may not be
able to make a claim that future cash flows have been affected. The practitioner should request the fol-
lowing:

 Any and all financial information provided to the buyer

 Any and all acquisition-related valuation models prepared by the buyer

 Any and all additional due diligence information and reports reviewed by the buyer in prepara-
tion for the acquisition

The practitioner should evaluate whether the target is permanently impaired as a result of the disputed
adjustment amount.

60 © 2020 Association of International Certified Professional Accountants