Uncover how a $22 million M&A dispute hinged on a single accounting definition. This post dives into the critical challenge buyers, sellers, and advisors face when negotiating purchase price adjustments: should calculations follow GAAP or historical accounting practices? Learn how strategic contract drafting and pre-closing due diligence are essential to protect your deal’s value and avoid costly litigation in lower middle market private company acquisitions.
M&A Stories
June 12, 2025
In the acquisition of private lower middle market businesses, it’s standard practice for the purchase price to be adjusted after closing based on financial metrics like cash, indebtedness, or working capital. This mechanism is commonly known as a purchase price adjustment (PPA). A frequent source of contention between buyers and sellers arises when the buyer calculates these financial metrics using generally accepted accounting principles (GAAP), while the seller relies on its historical accounting practices. Without precise contractual language, this divergence can lead to significant post-closing disputes.
This precise challenge surfaced recently in a Delaware Court of Chancery case involving the acquisition of a data center company by a Bitcoin mining company. A key part of their deal involved a PPA tied to the target company’s closing indebtedness. To resolve potential disagreements over the exact amount of indebtedness, the parties wisely agreed to submit any disputes to an independent accounting expert for a binding determination.
The heart of the disagreement revolved around how to treat two large, up-front payments the data center company had received from customers before the closing. Historically, the target had treated these as recognized revenue, meaning they were not recorded as deferred revenue and, therefore, did not appear on its balance sheet as indebtedness. However, the stock purchase agreement stipulated that indebtedness for the purpose of calculating the PPA must be calculated “in accordance with GAAP” and also “consistent with the target’s historical accounting practices.”
Following the closing, the buyer asserted that, under GAAP, these up-front payments should have been classified as deferred revenue. This reclassification increased the target’s indebtedness by over $22 million, consequently reducing the purchase price by that same amount. The seller vehemently objected, contending that the calculation had to adhere to the target’s well-established historical accounting practices, which notably did not treat up-front customer payments as deferred revenue.
When the dispute went before the accounting expert, the expert sided with the buyer, determining that these up-front payments indeed constituted deferred revenue as required by GAAP. The seller subsequently challenged this decision in the Delaware Court of Chancery. The court affirmed the expert’s decision, clarifying that the accounting methodology outlined in the stock purchase agreement prioritized GAAP compliance. The court noted that the target’s historical accounting practices would not be followed for the PPA if they were found to be non-compliant with GAAP, as was determined in this instance.
The financial ramifications of this clarification were substantial. In this case, the court’s interpretation, which favored GAAP over the target’s historical accounting practices, shifted more than $22 million from the seller to the buyer. This outcome underscores the critical importance of absolute clarity in defining the accounting methodology for a PPA in an M&A agreement.
For sellers and their advisors, the lesson is not simply to insist on historical practices, but rather to strategically analyze which accounting standard—GAAP or the target’s historical practices—will yield the most favorable financial outcome for each specific PPA metric. Once that determination is made, the stock purchase agreement’s accounting methodology must explicitly define that preference, even if it means stating that historical practices will govern where they diverge from GAAP. This requires meticulous drafting that goes beyond general references and directly addresses how potential conflicts will be resolved. Conversely, buyers and their advisors benefit from equal clarity, ensuring that the acquired business’s financial position is valued according to agreed-upon and explicitly defined standards, avoiding unexpected liabilities. Precise contractual provisions, carefully negotiated during the pre-closing phase, are the best safeguard against such costly post-closing disputes.
See: Northern Data AG v. Riot Platforms, Inc., C.A. No. 2023-0650-LWW (Court of Chancery of Delaware 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 in lower middle market private target deals..
By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.
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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