Discover how a hidden “goods in transit” accounting error triggered a post-closing fraud lawsuit for a lower middle market seller in the FeraDyne Outdoors v. Reaser case. This post analyzes the dangers of relying on informal email assurances and historical accounting practices rather than clear contract language. Learn why diagnosing financial “blind spots” through a targeted pre-closing review is essential to protecting your purchase price, and how to use a Specific Accounting Principle to immunize your deal against disputes over freight-in costs and unrecorded liabilities.
M&A Stories
November 29, 2025
For owners of manufacturing or distribution businesses, inventory is rarely static. At any given moment, you are likely to have raw materials or finished goods sitting on a truck or a container ship. In the world of M&A, these are known as “goods in transit.”
When you sell your business, the accounting treatment of the shipping costs for these goods can be a major flashpoint. A recent case from the Delaware Superior Court, FeraDyne Outdoors, LLC v. Reaser, highlights exactly how a lower middle market Seller faced costly litigation because he didn’t realize his own accounting position was flawed.
The Case of the Unpaid Shipping Invoices
The case involved Daniel Reaser, the owner of a private business that designed and sold hunting and outdoor equipment (the Seller). He agreed to sell the business assets to FeraDyne, a large private equity-backed platform company in the outdoor space (the Buyer).
The deal structure was standard for this market. The purchase price was based on a multiple of EBITDA, subject to a working capital adjustment.
During the pre-closing period, a specific issue arose regarding invoices from a shipping vendor. These invoices totaled a significant sum for transportation services related to goods in transit. The Seller believed these invoices did not need to be listed as liabilities because the legal title to the goods had not yet transferred to the business.
Crucially, the Seller sought validation from the wrong source. He asked the Buyer’s counsel if this treatment was acceptable. The Buyer’s lawyer sent an email stating these items did not need to be scheduled. Comforted by this assurance, the Seller assumed he was safe and left the invoices off the books.
The Post-Closing Surprise
Shortly after the deal closed, the Buyer took a different view. They argued that the failure to record these shipping invoices understated the company’s liabilities and, consequently, overstated EBITDA.
The Buyer argued that under proper accounting rules, the shipping services had been performed and the liability had been incurred. The Buyer filed a lawsuit alleging breach of contract and fraud.
The Mistake: Failure to Diagnose the Risk
The Seller’s mistake was a failure of diagnosis. He didn’t know his accounting position was weak, so he didn’t know he needed to protect it.
He relied on two dangerous sources of comfort: his own historical practice (“we’ve always done it this way”) and the Buyer’s lawyer. Asking the opposing counsel for accounting advice is a critical error. The Buyer’s lawyer is not your accountant, and their email assurances often vanish once the “Entire Agreement” clause kicks in.
To fix this, the Seller didn’t need to pay $50,000 for a full Quality of Earnings report. He simply needed a competent M&A accountant to perform a targeted review of his “cutoff” procedures for inventory and payables. A targeted review would have revealed the hard truth: “Under M&A standards, you likely owe this money. If we don’t fix this in the contract, they will sue you for it later.”
Because the Seller never got that diagnosis, he assumed he was safe and failed to negotiate the necessary protection.
The Solution: Diagnose, Then Immunize
You cannot effectively negotiate a waiver for a problem you don’t know exists. The legal risk management process requires two steps:
- The Diagnostic Step (The Targeted Review) Before you sign the deal, engage an M&A-focused accountant for a targeted review of specific high-risk areas, such as goods in transit, warranty reserves, and vacation accruals. Ask them specifically: “Is my historical treatment of this item defensible under strict purchase price accounting?”
- The Contractual Fix (The Specific Accounting Principle) Once the risk is identified, you can neutralize it. You don’t necessarily have to change your accounting; you just have to be transparent. You negotiate a Specific Accounting Principle in the Purchase Agreement that overrides GAAP for that specific item.
You include a definitive statement in the Accounting Principles schedule:
For purposes of this Agreement, freight and shipping costs related to goods in transit where title has not yet passed to the Seller shall be excluded from the calculation of Current Liabilities and Indebtedness, regardless of GAAP.
By identifying the weakness first, the Seller could have turned a “fraud” allegation into a clearly negotiated deal point.
See: Feradyne Outdoors, LLC v. Reaser, C.A. No. N23C-03-173 SKR CCLD, Superior Court of Delaware (December 20, 2023).
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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