Page 64 - M & A Disputes

benefit of its bargain. However, if several years have passed since the acquisition, the practitioner should
focus on the financial results of the company in the first year or two immediately following the acquisi-
tion. As years pass after the acquisition date, the financial condition of the target company will likely
improve or deteriorate due to the buyer’s management of the company. Such a change in the target’s fi-
nancial condition likely does not reflect prior actions of the seller.

An example of how the practitioner can analyze whether the buyer overpaid for the business is presented
as follows:

The buyer claims a working capital claim at a multiple based on an alleged misrepresentation
made by a seller. The buyer claims that it is entitled to damages because the target company is
worth less than it paid for it. A review of the buyer’s valuation models and projections prior to
the acquisition demonstrate that the target’s actual performance has outperformed the projec-
tions. A subsequent analysis performed by the practitioner supports that the company is worth
significantly more than the purchase price as of the year after the closing (that is, the target com-
pany’s EBITDA increased significantly postclosing). The analysis performed by the practitioner
may be used as a potential defense for the seller in demonstrating that the buyer was not entitled
to benefit of the bargain damages at a multiple or into perpetuity. Of course, the analysis of the
target’s subsequent performance depends on the case law in each jurisdiction.

In addition to the factors previously noted, the following list presents examples of contemporaneous and
postclosing factors that the practitioner may consider when conducting his or her analysis in assessing
potential damages based on indemnity claims. The following list is not an all-inclusive list of such fac-
tors:

 Contemporaneous factors

i. Is the item in dispute a working capital claim, an indemnity claim, or both? This factor is
affected by the buyer’s expectations (that is, did the one-time effect item have an impact
on the valuation model relied on by the buyer).

ii. What period(s) does (do) the disputed item(s) affect: current, multiple, or longer term?

iii. What impact does the item have on the target company cash flow?

iv. What impact does the item have on the overall risk profile?

v. What impact does the item have on the comparability to guideline companies if the valua-
tion pricing multiple was based on such companies?

vi. What were the seller’s alternatives to a sale to the buyer?

 Postclosing factors

i. How did the item in dispute materialize?

ii. How does the financial performance of the target company compare to the buyer’s expec-
tations at the deal time?

iii. How does the financial performance of the target company compare to the seller’s fore-
casts at the deal time?

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