Explore the intricate world of M&A transactions through our latest blog post, ‘Navigating M&A Earnout Disputes: A Lesson from Nomar Enterprises, LLC v. Rugged Solutions America, LLC.’ Uncover the strategic use of earnouts, the risks they pose for both buyers and sellers, and the critical role of EBITDA metrics. Gain valuable insights from a real case, Nomar Enterprises, LLC v. Rugged Solutions America, LLC, as we delve into the dispute resolution process and the court’s approach to financial metric disputes. Stay informed and navigate the complexities of M&A with our M&A Stories.
February 25, 2024
In the intricate realm of M&A transactions, earnouts stand as a strategic bridge between a seller’s ambitious asking price and a buyer’s more conservative bid. This mechanism hinges on the post-closing success of the acquired business, commonly gauged by metrics like EBITDA.
Earnouts, however, pose inherent risks for both parties involved. Buyers may find themselves entangled in legal disputes if the earnout isn’t met, while sellers rely on the buyer’s adept management to ensure the business performs optimally.
A recurring source of contention revolves around the calculation of earnout metrics, notably EBITDA. Many M&A agreements wisely designate an independent accountant to arbitrate such disputes.
Take, for instance, the September 30, 2020, acquisition of a rugged computer business for $13 million in cash at closing, accompanied by a $4.5 million EBITDA earnout. When the earnout wasn’t realized, the seller challenged the buyer’s EBITDA calculation and alleged fraud and breach of the asset purchase agreement.
The dispute found its way to a Houston federal district court. The seller insisted on the court settling fraud and breach of contract claims before submitting the EBITDA calculation to the designated independent accountant. The court, however, took a pragmatic stance, directing the parties to first resolve the EBITDA calculation dispute.
It’s a valuable lesson from Nomar Enterprises, LLC v. Rugged Solutions America, LLC, where the court prioritized the financial metric dispute before delving into broader claims. This approach ensures a methodical and step-by-step resolution, streamlining the legal process.
Notably, the accounting firm designated for dispute resolution underwent an acquisition by a larger entity. The seller contended that this change rendered the independent accountant dispute resolution procedure unenforceable, but the court dismissed this argument.
In essence, while the seller may obtain its earnout through fraud and breach of contract damages, the court underscored the importance of adhering to the independent accountant’s role in settling the EBITDA calculation first.
Nomar Enterprises, LLC v. Rugged Solutions America, LLC, Civil Action No. H-23-1794, United States District Court, S.D. Texas, Houston Division (January 5, 2024).
Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.
Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Telephone: 714 273-6291
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