Don’t let a fast close lead to costly M&A disputes. This blog provides actionable legal insights for lower middle market buyers, sellers, and advisors on how robust pre-closing steps – from due diligence to contractual protections – can safeguard your transactions and prevent future litigation.
M&A Stories
April 16, 2025
The allure of a swift transaction can be strong in the lower middle market, but as a recent New York Supreme Court case illustrates, prioritizing speed over thoroughness can lead to costly disputes down the line. This case involved the asset sale of a web hosting business where the seller alleged the buyer emphasized a rapid closing (within 4-5 weeks) and claimed independent verification of the seller’s EBITDA. Based partly on this promise, the seller accepted the buyer’s offer, potentially foregoing other interested parties with higher bids. However, post-closing, the buyer allegedly reneged on the agreed-upon purchase price, triggering litigation and counterclaims of fraudulent inducement from the seller.
The Takeaway: While a quick closing can be a significant deal driver, particularly for sellers seeking liquidity or buyers aiming to capitalize on a perceived opportunity, it should never supersede rigorous pre-closing due diligence. In this instance, the seller alleged that the buyer’s emphasis on speed, coupled with representations about their independent financial assessment, influenced their decision to proceed. The subsequent dispute suggests the buyer might have prioritized expediency, potentially leading to incomplete or flawed due diligence regarding the business’s financials.
The Recommendation: For both sophisticated buyers and sellers in the lower middle market, the pressure of a quick close necessitates heightened vigilance, not rushed processes.
For Buyers & Their Advisors: Resist the urge to shortcut standard due diligence procedures, regardless of the seller’s timeline pressures or your own desire for a swift acquisition. Implement internal protocols that mandate a minimum level of scrutiny. Meticulously document the basis of the purchase price in the Asset Purchase Agreement (APA), clearly referencing the agreed-upon valuation methodology and the specific financial information relied upon. Do not rely on verbal assurances, especially concerning financial calculations. If a seller emphasizes your “independent calculations,” demand full transparency into their methodology and underlying data. Reconcile these findings with standard accounting practices and your own thorough analysis. Ensure robust integration clauses are in place, clearly stating the APA constitutes the entire agreement and supersedes prior discussions.
For Sellers & Their Advisors: While a quick close is attractive, prioritize providing comprehensive and well-documented information upfront. This can expedite the buyer’s diligence without creating suspicion or grounds for future disputes. Be realistic about the buyer’s need for due diligence, even in a fast-paced deal. Resist the urge to pressure buyers into skipping crucial steps. Work closely with legal counsel to precisely define the scope and limitations of your representations and warranties in the APA, especially concerning financial information.
In conclusion, while speed can be a valuable asset in M&A, it should be a carefully managed factor, not a justification for compromising thorough pre-closing due diligence. As this case suggests, prioritizing a quick close without a solid understanding of the underlying business can ultimately lead to protracted and expensive disputes.
See: World Host Group US Inc. v. O’Cloud Ventures, LLC Index No. 654128/2023, Motion Seq. No. 003, Supreme Court, New York County, (April 1, 2025).
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 recenegal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5
and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM
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