EBITDA Purchase Price Adjustment Provision Center Stage of $4.4 Million Fight


M&A Stories

October 9, 2020


Many acquisitions are priced based upon EBITDA. Often the purchase price is adjusted after the closing based upon some agreed upon formula such as EBITDA.

The deal

This deal was a sale of the assets of the business for $11 million. However, the purchase price was to be adjusted after the closing, up or down, depending upon the FYE 2015 EBITDA.  The adjustment would be 4 times the amount that FYE 2015 EBITDA was higher or lower than $2,750,000.

After the closing the seller determined that the FYE 2015 EBITDA was $3,854,328 which would mean an upward purchase price adjustment of about $4.4 million.

The lawsuit

A purchase price adjustment dispute broke out between the buyer and seller in an Indianapolis federal district court. The crux of the lawsuit was the asset purchase agreement provision that was designed to deal with disputes over determination of the purchase price adjustment.

In essence the provision says that the seller determines the EBITDA for the FYE 2015 and that the seller’s determination is final unless the buyer objects within 30 days.

Preliminary to trial, the seller asked the court for an order to exclude any buyer evidence challenging the seller’s calculation of EBITDA. According to seller, the asset purchase agreement or APA required the buyer to submit in writing any objections the buyer had to the seller EBITDA calculation within 30 days. No objections were raised within the thirty days period following the submission by the seller. Thus, the seller argued that the buyer waived any right the buyer may otherwise have had to challenge the seller EBITDA calculation.

The buyer countered arguing that the APA required the seller to prepare and submit a “certificate” containing the final EBITDA calculation. Because such a certificate allegedly was not prepared and submitted by the seller, the 30-day objection window was never triggered.

The court looked at the APA provision which said: “Seller shall deliver to Purchaser the 2015 Financial Statements, together with a certificate setting forth the final EBITDA and any adjustments, based on the final EBITDA, to the Base Purchase Price. If Purchaser does not object … within thirty (30) days after receipt, or accepts such items in writing during such thirty (30) day period, the … Final EBITDA prepared by the Seller Accountant and the EBITDA Adjusted Purchase Price set forth in such certificate shall become final and binding upon the parties”.

The issue boiled down to whether or not the seller had provided a certificate within the meaning of the asset purchase agreement. The court decided that the buyer could produce evidence that no certificate was supplied by the seller to the buyer as provided for in the asset purchase agreement: “the agreement did not define `certificate,’ making it apparently an ‘ambiguous’ term. … Accordingly, “whether … (the buyer is) … prohibited from challenging the final EBITDA is an unresolved question of law requiring interpretation of the Agreement. … We are unable to resolve prior to trial whether … (the buyer) … waived … (the buyer’s) … contractual right to challenge the final EBITDA or whether, as a matter of contract interpretation, … (the buyer) … was relieved of that obligation because the specified “certificate” was never issued and the time to object was never triggered.”

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)


Clearly the seller put the buyer on notice of its EBITDA calculation. However, words in an agreement matter and the requirement for a certificate not defined is a recipe for litigation if the stakes are high enough.

With 20/20 hindsight the agreement could have stated that the certificate to be supplied is substantially in the form of 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 

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