Part 2 of 3: Protecting Value: Representations and Deal Dynamics
3-Part Series – How Accountants Steer M&A—A Lawyer’s Insight
Once the deal structure is set and diligence is underway, the focus shifts to protecting value. This is where accountants and lawyers work side by side crafting representations, making adjustments, and preparing for post-close reconciliation.
Representations and Warranties: Built on Financial Reality
Representations and warranties are legal tools, but accounting plays a vital role. Financial representations cover everything from GAAP compliance to tax filings to inventory valuation. And when they’re vague or misaligned, they open the door to disputes.
Imagine a transaction where the seller warrants that their financial statements are “GAAP-compliant.” On the surface, everything checks out. But after closing, the buyer reviews the revenue timing and realizes it was unusually aggressive. Although technically within GAAP, it was not reflective of the company’s typical performance. That disconnect could lead to questions about whether the financials fairly represented the business, and potentially spark an indemnity claim. With more precise language in the representations — and earlier collaboration between legal and accounting teams — that kind of dispute might have been avoided.
Accountants know what accounting standards in representations are normal or aggressive, and what needs to be disclosed. Their input helps lawyers write representations that reflect reality, not just boilerplate.
Purchase Price Adjustments: Where Definitions Matter
Working capital adjustments, earnouts, and other price mechanisms are where deals get won or lost. Accountants help define the metrics, model the outcomes, and reconcile the results.
Consider a transaction where a significant earnout hinges on inventory valuation. The seller applies FIFO, while the buyer expects weighted average. That mismatch in methodology could lead to confusion during post-close reconciliation and potentially spark a dispute over the earnout calculation. Without early alignment on definitions and assumptions, even well-intentioned parties might find themselves in prolonged negotiations or arbitration.
Accountants can prevent this by aligning definitions early. What counts as cash? What’s debt? How is AR aged? These aren’t just accounting questions, they’re deal terms.
The documentation, assumptions, and reconciliations of accountants become the foundation for resolution.
The Takeaway Protecting value requires both legal precision and financial clarity. When lawyers and accountants collaborate closely, they create agreements that reflect reality and reduce the risk of post-close disputes.
To learn more, please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.