Explore a real case from 2021 involving the sale of a Phoenix-based commercial building remodels and maintenance business for $3.8 million. Delve into the controversy, legal actions, key findings, and implications of the case, providing insights into the dynamic world of M&A.
M&A Stories
November 12, 2023
Introduction:
In the dynamic world of M&A, buyers and sellers often adjust the purchase price based on actual working capital at closing. This is particularly true in industries where working capital can fluctuate significantly. Let’s delve into a real case from 2021 involving the sale of a Phoenix-based commercial building remodels and maintenance business for $3.8 million.
Background:
The asset purchase agreement allowed for a purchase price adjustment based on closing working capital.
Controversy:
Post-closing, the seller submitted its working capital calculation, but the buyer contested it, citing non-compliance with generally accepted accounting principles (GAAP), a requirement of the purchase agreement. Attempts to engage Grant Thornton, tasked with choosing the prevailing statement, fell through.
Legal Actions:
The buyer filed a lawsuit accusing the seller of various breaches, including failure to provide software, a $90k deposit, and books, failure to pay obligations, failure to terminate employees, and failure to disclose liabilities. The seller sought arbitration, but the appellate court ruled against it.
Key Findings:
The appellate court clarified that the purchase agreement did not mandate arbitration. Grant Thornton was designated as an expert accounting firm to resolve factual disputes about working capital, not as an arbitrator. The court emphasized the absence of terms like arbitration, adjudication, or dispute resolution.
Implications:
The seller’s push for arbitration likely aimed to secure Grant Thornton’s decision as final. Notably, in Arizona, unlike most states, the prevailing party in an M&A dispute can recover legal fees, as mandated by statute (A.R.S. § 12-341.01).
Case Reference:
DMS Companies, Inc. v. Hernandez, No. 1 CA-CV 23-0028 Court of Appeals of Arizona, Division One (Filed October 12, 2023).
By John McCauley: I write about recent legal 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
Podcasts https://www.buzzsprout.com/2142689/12339043
Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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