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requirement of consistency with historical accounting practices, the determination of target net working capital, transaction‐specific adjustments, selected audit topics, and subsequent events.

      The third part – The Accounting Arbitration – provides a discussion of the dispute resolution process from the selection and retention of the accounting arbitrator through the arbitration award. Included are various considerations for the parties in preparing their submissions to the arbitrator as well as considerations for the arbitrator in reaching a determination on the items in dispute.

      The fourth part – The Disputed Items – provides a detailed discussion of the drivers of many disputed items and several common categories of disputed items such as inventory, accounts receivable, and contingent liabilities. We discuss the genesis of such disputed items, important considerations when evaluating them, and how to present them to an accounting arbitrator. Although we cover some relevant accounting guidance, the emphasis is not on discussing all the ins‐and‐outs of GAAP. This book is not intended to be a technical accounting manual.

      The final part – Other Topics – closes out the book with a discussion of several important topics, including the impact of contractual choices in the purchase agreement, the interaction between indemnification provisions and net working capital adjustment mechanisms, other purchase price adjustment mechanisms, and finally a brief discussion of international considerations.

      Acknowledgments

      We want to express our appreciation to our clients, their retained professionals, and our current and former colleagues, including, but certainly not limited to: Cees Hardeman, Dale Kitchens, Catherine Madrid, Hans van Sonderen, Rebecca Szelc, and Greg Wolski. We have learned a great deal from all of them throughout the years about both M&A transactions and disputes as well as a variety of other topics. We look forward to continuing to do so.

      We want to thank Stuart McCrary for introducing us to Bill Falloon at Wiley. In addition, we want to thank Bill and everybody else at Wiley who worked on this book, including Shelley Flannery, Judy Howarth, Julie Kerr, and Caroline Maria Vincent.

      Finally, we want to thank Amanda Nauert for her review of the manuscript and her improvements to the final product. We also greatly appreciate Teddy Tankersley's willingness to acts as a sounding board on a variety of topics.

      About the Authors

      A. Vincent Biemans is a Managing Director of Berkeley Research Group, LLC (“BRG”). He assists U.S. and European buyers and sellers with their M&A disputes both as a (party‐retained) advisor and as a (jointly retained) neutral accounting arbitrator. In addition to advising on M&A disputes, he also has significant experience developing complex damages and valuation assessments. He has been involved with engagements across a wide variety of industries and with economic interest covering a broad size spectrum (from less than $1 million to more than $10 billion).

      Prior to joining BRG, Mr. Biemans served at several professional services firms, including a public multinational consultancy; a litigation, valuation, and financial advisory boutique; and a law firm. He started his career in an advisory practice in The Netherlands, where he advised clients ranging from startup ventures to publicly traded multinationals. He moved to the United States in early 2007.

      Mr. Biemans is a Certified Public Accountant (CPA). He also holds the Chartered Financial Analyst (CFA), Accredited in Business Valuation (ABV), Certified Fraud Examiner (CFE), and Chartered Global Management Accountant (CGMA) designations. He holds advanced degrees in accountancy (postgraduate), economics (M.Sc.), and fiscal law (LL.M.). He is a member of various professional organizations.

      Gerald (Jerry) Hansen is also a Managing Director of BRG. He is a CPA and forensic accountant with extensive experience across a variety of accounting, audit, and financial forensics services including M&A disputes (as an arbitrator and an expert), audit services, expert services, forensic due diligence, and fraud investigations. He has served at a Big 4 public accounting firm, a multinational consultancy, as well as global corporations in a career spanning over 25 years. Mr. Hansen previously served as the Southwest Region leader of Ernst & Young's Transaction Forensics practice, a specialty practice that focused on disputes, investigations, and forensic due diligence services that stem from contemplated and completed merger and acquisition transactions. He also has in‐house experience in software revenue recognition, mortgage banking, and insurance claims.

      Mr. Hansen has provided dispute‐, forensic‐, and audit‐related services to clients in a wide range of industries including real estate, technology, energy, transportation, manufacturing, software, food services, publishing, automotive, healthcare, retail, staffing services, advertising, and financial services. He is a contributing author to The Litigation Services Handbook as well as the AICPA book The Guide to Investigating Business Fraud, in addition to other articles and presentations. He holds a BBA in Finance from Southern Methodist University and an MS in Accounting from the University of Virginia.

      PART One

      The M&A Dispute Framework

      CHAPTER 1

      Introduction to M&A Disputes

      The purchase and sale of a business is typically an extensive process involving the identification of potential counterparties, due diligence, negotiation of a price and the purchase agreement, and finally the closing of the transaction. The closing represents the culmination of months of hard work often involving the assistance of a variety of advisors, including investment bankers, transaction counsel, and accountants.

      The closing, however, does not necessarily mean that the transaction is fully completed and the purchase price is set. Many contracts governing the acquisition of a company or a business contain one or more mechanisms that allow for post‐closing adjustments to the purchase price based on a predetermined metric such as net working capital; earnings before interest, taxes, depreciation, and amortization (EBITDA); or some other metric. Such mechanisms and any resulting proposed purchase price adjustments may be resolved amicably between the parties. On the other hand, the adjustment process may lead to post‐closing disputes between the parties regarding the appropriate amount of the purchase price adjustment.

      THE TRANSACTION LIFECYCLE

      Purchase price adjustments are generally implemented after the closing of the transaction. The underlying mechanisms, however, are agreed upon prior to the closing. Moreover, the actual post‐closing adjustments may well find their genesis in pre‐closing events. Shown here is a sample representation of the lifecycle of a typical merger and acquisition transaction.

      Sample Transaction Lifecycle with NWC Adjustment

      M&A transactions can take a variety of forms and can follow varying timelines. Notwithstanding, the transaction lifecycle can generally be broken down into two major time periods – pre‐closing and post‐closing – with a variety of activities occurring in each period. For example, if the seller initiates the sales process, it may perform a variety of activities early on in the process to identify potential buyers and to get the company ready for sale. Once the field of potential buyers has narrowed, the parties can engage in further information exchanges, the buyer can perform its due diligence, and the parties can negotiate the purchase agreement.

      The purchase agreement can incorporate both a negotiated purchase price amount (e.g., $1 billion) as well as a variety of adjustments that need to be made to arrive at the amount that is to ultimately be paid by the buyer. By means of example, the purchase price may be set on a debt free/cash free basis, that is, the agreed upon purchase price of $1 billion assumes the company has no debt and no cash. To arrive at the amount ultimately owed by the buyer, the company's debt and cash at closing have to be, respectively, deducted from and added to the negotiated purchase price amount (of $1 billion).

      Transactions routinely provide for purchase price adjustments to be implemented post‐closing. For example, many purchase agreements contain a net working capital adjustment mechanism in order to have the final purchase price – i.e., after any post‐closing adjustments – reflect

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