Background

The purchasers of a major services company were in dispute with the former owners over the amount of earn-out consideration, a deferred element of the purchase price linked to the performance of the company post-sale.

The earn-out calculation was driven by how much the company’s profit margin exceeded the target following the sale, and involved a number of adjustments to, and exclusions from, the company’s management accounts. The purchasers drafted accounts resulting in a zero earn-out consideration, and argued that no further amounts were due under the share purchase agreement (SPA). The sellers disputed the draft accounts, contending that the purchasers’ adjustments were invalid in principle and/or incorrectly calculated, and that an earn-out consideration was due.

Under the SPA, any disputes in relation to the earn-out consideration were to be resolved by an Expert Determiner, an accountant independent to both parties. A Partner in FRP’s Forensic Services team was appointed as Expert Determiner.

Action

The Forensic Services team reviewed the submissions by both parties, requesting further documentation and explanations where needed. Each of the earn-out adjustments made by the purchasers were examined, alongside the sellers’ arguments as to their legitimacy and accuracy. Further adjustments proposed by the sellers were also considered, taking into account any potential inconsistencies between the two parties’ arguments.

The team carefully assessed the validity of adjustments relating to the exclusion of revenue for specific projects, the release of certain provisions and accruals and changes in accounting policies and procedures.

Outcome

The Forensic Services team prepared a report setting out the Expert Determiner’s decision for each item in dispute. Every decision was supported by reasoned analysis that took into account the relevant clauses in the SPA, US Generally Accepted Accounting Principles, the target company’s accounting policies and procedures in the relevant period, and what the expert understood the parties to have meant when they entered into the SPA.

The resulting earn-out consideration was also calculated; however, the parties were able to settle the dispute after the report was finalised, but before it was released.