2 trends to focus on in purchase agreement language

Brian R. Chmiel, Erin McGowan
2 trends to focus on in purchase agreement language

Crowe specialists discuss two trends in purchase agreement language that can lead to future challenges – and what actions companies can take to mitigate those challenges.

Purchase agreement language is a vital part of a transaction. In fact, since the language controls the details affecting the final purchase price, it might be the most important part of the deal. A couple of trends in purchase agreement language can cause issues down the road. Here are details and some proactive steps firms can take to help lessen these challenges.

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Trend 1: Not updating purchase price language based on changing accounting guidance and standards

In the purchase agreement, a true-up clause typically determines the final purchase price, with a closing statement that covers working capital, cash, indebtedness, and transaction expenses. While purchase agreements include definitions for working capital and how to calculate it, those definitions are often broad – for example, “use generally accepted accounting principles (GAAP).” But accounting standards change regularly, and so careful consideration should be given to recently enacted GAAP guidance. For example, both the updated lease accounting standard (Accounting Standards Codification (ASC) Topic 842, “Leases”) and revenue recognition standard (Topic 606, “Revenue From Contracts With Customers”) have had impacts on the final purchase price true-up process.

In some instances, buyers and sellers address the new standards in their purchase agreements and determine how to calculate the effects – but others don’t mention the standards at all, which creates potential purchase price complications – most frequently to either working capital or earnouts – that aren’t initially contemplated by either party. That’s why it’s vital to be keyed into proposed standard changes well in advance of any deal and consider how those changes might affect the calculations for critical post-closing date purchase price adjustments in the contract.

Future proposed standard changes that could affect purchase agreements

  • “Intangibles – Goodwill and Other – Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets”
  • “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments – Acquired Financial Assets”
  • “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”

Trend 2: Generic language in purchase price agreements that can lead to discovery issues

One of the biggest issues in post-acquisition disputes is how generic purchase agreement language can cause document exchange issues. Purchase agreements often contain generic language stating, “the seller has access to records and information from the buyer” or “the seller has reasonable access to records.” However, if purchase agreements don’t specifically identify or define those records, it’s often up to buyers to decide which records are relevant for the sellers to access. Sometimes, the sellers might disagree with the buyers’ definition of relevance and communicate that they need more information to accurately determine their calculations of working capital, earnouts, and so on.

On the buyer side, certain records (such as custom reporting) can be difficult and/or time-consuming to produce, so buyers might offer general records until the seller explicitly requests specific records. On the seller side, significant detailed requests might be made regarding the type and volume of documents. Sometimes this document exchange can escalate to a legal dispute, but in reality, this is an accounting issue that can be solved with the right amount of consideration and up-front negotiation.

For both buyers and sellers, it’s important to be very specific in the purchase agreement about the exchange of financial documents and records. Does the seller want access to a particular system to review transactions, or the opportunity to speak directly with certain people in charge of preparing the calculations for the other party? Is the buyer tempted to be as generic as possible, and sort everything out in court or arbitration? That can come at a cost.

Generic purchase agreement language can lead to a post-acquisition dispute, which costs both parties money and time. The real discussion in this phase should be focused on the numbers and which party is more in line with purchase agreement terms – not haggling over documents. If parties are as specific as possible about expectations up front, it allows both parties to negotiate and get to a mutually agreeable place before the deal is signed.

Standards and market trends are changing all the time, which is why it’s important to keep up on what’s happening and update purchase agreement language before the deal is done. However, it can be hard to keep up on these standards while in the middle of a deal – or even when first considering purchase agreement terms. Working with a trusted accounting consultant pre-acquisition can help companies spot any issues and identify the right solutions for their business.

Contact our team

Our specialists have their fingers on the pulse of acquisition and post-acquisition work, with extensive experience supporting buyers and sellers and serving as neutral arbitrators. This background allows us to see your deal from all sides and help you navigate through any challenges you might face – including purchase agreement language. Contact us today to see how we can help your company think through standards, discovery, and other best practices.
Brian Chmiel
Brian R. Chmiel
Partner, Forensics Consulting
Erin McGowan
Erin McGowan