Explore a recent M&A case involving a $4.4 million adjustment dispute tied to EBITDA calculations. Learn about the legal intricacies and implications for purchase price agreements.
M&A Stories
October 9, 2020
Introduction:
In the context of acquisitions, the cost frequently depends on a company’s earnings before considering interest, taxes, depreciation, and amortization (EBITDA), providing a glimpse of its cash flow. It’s common for parties to initially settle on a provisional price using projected EBITDA for a year and later modify it post-closure once the actual annual figures are available.
The Deal:
In this case, a business’s assets were sold for $11 million. However, the final purchase price was subject to change after the deal concluded, based on the company’s 2015 EBITDA. The adjustment would be four times the difference between the 2015 EBITDA and $2,750,000.
Following the closure, the seller determined the 2015 EBITDA to be $3,854,328, which would result in an upward adjustment of around $4.4 million.
The Lawsuit:
A disagreement regarding the purchase price adjustment arose between the buyer and seller in a federal district court in Indianapolis. The core of the lawsuit revolved around a provision in the asset purchase agreement designed to handle disputes concerning the adjustment of the purchase price.
Essentially, the provision stated that the seller’s determination of the 2015 EBITDA was final, unless the buyer raised an objection within 30 days.
Before the trial, the seller sought to block any evidence from the buyer challenging the seller’s EBITDA calculation, arguing that the buyer hadn’t objected within the 30-day window.
The buyer countered by asserting that the asset purchase agreement required the seller to create and submit a “certificate” containing the final EBITDA calculation. Since such a certificate hadn’t been prepared or submitted by the seller, the 30-day objection period had not been activated.
The court found that the purchase agreement didn’t define “certificate” apart from its need to contain the EBITDA calculation and the adjusted purchase price. Therefore, whether the buyer could object depended on whether the seller had supplied the buyer with such a certificate. This issue was best suited for resolution during the trial.
This case is referred to as Henman Engineering And Machine, Inc. v. Norman, No. 1:17-cv-00701-SEB-TAB, United States District Court, S.D. Indiana, Indianapolis Division, (August 13, 2020)
Comment:
Although the seller communicated its EBITDA calculation to the buyer, the precise language used in agreements holds significance. If the stakes are high, an undefined requirement like the need for a “certificate” can lead to legal battles. Looking back, it would have been advisable for the agreement to specify that the certificate should closely resemble an exhibit attached to the asset purchase agreement.
By John McCauley: I help people manage M&A risks involving privately held companies.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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