Growth is a goal of nearly every company, and mergers and acquisitions are one vehicle to make growth happen. When it comes to M&A, the last thing you want is an unexpected dispute after signing on the dotted line. Acquisition and merger agreements can be complicated, making post-signing disputes quite common. To save time, money, and headaches, follow these tips.1. Use clear language to outline accounting and working capital expectations
Many closing agreements include clauses that allow for purchase price adjustments based on post-closing working capital levels. How is working capital estimated? Here lies a potential dispute. In your agreement, be sure to include clear definitions and examples of how working capital, and all other relevant financials, is calculated. Put in writing every variable that is factored into working capital. If a dispute does arise, have your attorney negotiate and resolve the conflict.2. Exercise proper due diligence
Beyond financial responsibilities, many disputes arise over obligations that the buyer will assume after the transaction relative to the assets being purchased. These come in many forms, whether in contract disputes or employee issues. In many cases these issues will not appear on the seller’s books, so they are subject to estimation. Proper due diligence is the key to avoiding these conflicts. The Purchase Agreement should include robust seller representations and warranties to disclose all outstanding obligations. In addition, requesting an estoppel certificate when appropriate.3. Implement Adjustment Provisions
While due diligence is an excellent protection, it does not safeguard you from misrepresented information or outdated financials. Acquisitions and mergers are usually negotiated before closing-date financials become available. To avoid disputes, an accountant or attorney can draft specific provisions for purchase price adjustments. A buyer can also choose to seek damages based on a revaluation. You may also negotiate a holdback provision to provide assurance that you will be covered in case an adjustment is needed. Rather than chasing the seller to get part of your money back, it is simply deducted from the holdback.
Mergers and acquisitions are quite complex and have major impacts on your business. Taking care in the purchase agreement can save you some headaches. By following the best-practices outlined above, you are one step closer to a surprise-free closing.