The amount of the purchase price in a business acquisition is often finetuned in the purchase agreement by a working capital mechanism; where the working capital at closing is calculated after the closing.
That was the case in this $1.25 million asset acquisition of a contract manufacturing, industrial fabrication and related installation services business. The APA had a closing working capital purchase price adjustment mechanism.
The provision required the buyer to make the calculation after the closing. If the seller disputed it then the dispute would be decided by an independent accountant. The accountant would be selected by mutual agreement of the buyer and the seller at that time.
After the closing the buyer calculated an amount of closing working capital that would result in an upward purchase price adjustment of $82K. The seller disputed it and the parties could not agree upon an accountant to resolve the dispute.
So, the dispute boiled over into a Pennsylvania trial court and then an intermediate appellate court; which described the litigation as “long, tortured and, at times, convoluted.” In the end the appellate court ordered the trial court to transfer the dispute for resolution to an independent accountant.
This case is referred to as TTSP Corporation v. Rose Corporation, No. 1498 MDA 2018, Superior Court of Pennsylvania (Filed: August 27, 2019)
This deal closed almost 3 years ago, and the battle is still not over. An alternative dispute resolution of a purchase price adjustment by an accountant might have resolved this dispute much earlier had the buyer and seller named the accounting firm in the APA. Leaving the selection of the accountant to the agreement of the parties after a dispute breaks out cost the buyer and seller unnecessary expenditures of time, stress and money.
Best to identify the accounting firm to resolve the purchase price adjustment calculation in the acquisition agreement.
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).
Telephone: 714 273-6291
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