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AICPA Practice Aid: Mergers and Acquisition Disputes G. William Kennedy, Ph.D., CPA/ABV Managing Director FTI Consulting, Inc.

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Presentation on theme: "AICPA Practice Aid: Mergers and Acquisition Disputes G. William Kennedy, Ph.D., CPA/ABV Managing Director FTI Consulting, Inc."— Presentation transcript:

1 AICPA Practice Aid: Mergers and Acquisition Disputes G. William Kennedy, Ph.D., CPA/ABV Managing Director FTI Consulting, Inc.

2 When Do Shareholder Disputes Occur? − 2 − M&A Transaction M&A Transaction Minority Shareholder Buyout Minority Shareholder Squeeze out Former Shareholder Dispute Shareholder Class Action Buyer Benefit of the Bargain/ Breach/Fraud Material Adverse Change Letter Of Intent Minority Shareholder Dissent Purchase Price Adjustment

3 AICPA Mergers and Acquisition Disputes Practice Aid The AICPA Practice Aid, Mergers and Acquisition Disputes was issued in early 2012 The Practice Aid was authored by the AICPA Mergers and Acquisitions Dispute Resolution Taskforce To supplement the Practice Aid, Taskforce activities included authoring articles for the AICPA Journal of Accountancy and providing presentations at AICPA National Forensic and Valuation Conference on M&A Disputes services provided by CPA’s

4 AICPA M&A Dispute Resolution Taskforce The Taskforce was comprised of 5 attorneys representing the ABA M&A Committee and 12 CPA’s representing the AICPA Forensic and Litigation Services Committee Members of the Taskforce were selected for their expertise in practice area of M&A disputes Taskforce activities included reviewing and commenting on the ABA’s Model Stock Purchase Agreement and the ABA’s Model Asset Purchase Agreement

5 Introduction and Scope of Practice Aid The Practice Aid was prepared for the CPA practitioner who serves in the role of the neutral accountant, consultant, or expert witness in engagements involving M&A purchase price disputes Focus of the Practice Aid: ■Theoretical ■Legal ■Accounting basis 5

6 Chapter 1: Overview of Merger and Acquisition Transactions and Disputes

7 The Purchase and Sale Agreement

8 ■Legal document memorializing the agreement of the parties ■Purchase price and post-close adjustment mechanisms (e.g. working capital/balance sheet true-ups) ■Provisions governing earnouts (if applicable) ■Representations and warranties of parties ■Indemnification provisions ■Offers protection but can also present hazards 8

9 Representations, Warranties, and Covenants To gain comfort in the valuation of the target, Buyers often require certain assurances from Seller. ■Financial statements provided by management during due diligence are prepared in accordance with GAAP ■Material information with respect to the business has been disclosed (e.g. litigation, environmental hazards, status of key customer relationships, significant contracts, etc.) ■No undisclosed Material Adverse Changes have occurred ■Operation of business in ordinary course 9

10 Determining the Purchase Price

11 The Purchase Price Reflection of investment value specific to transacting parties Reflects “bargained for”: ■Anticipated stream of future earnings or cash flows ■Measure of capital necessary to support operation in the normal course Often incorporates synergistic considerations 11

12 The Purchase Price Market Approach (Financial Element x Multiple) ■Financial element can be earnings measure (e.g. EBITDA) or balance sheet measure (e.g. assets) depending on business ■Multiple – Based on multiples derived from companies determined to be guideline comparable companies Income Approach ■Discounted cash flow valuation ■Required internal rate of return (IRR) based on earnings projection Cost Approach ■Not applicable in most deals 12

13 Concluding a Purchase Price ■While relevant, valuations of the parties do not always result in the precise purchase price agreed upon. ■A number of factors may influence the ultimate purchase price determination. ■The ultimate purchase price is the result of the negotiation between the parties. − 13 −

14 Chapter 2: Post Closing Purchase Price Adjustments

15 Post Closing Purchase Price Adjustments ■Introduction-Post Closing Purchase Price Adjustments ■Background of a Purchase Price Dispute ■The Role of a CPA in a Post- Acquisition Dispute ■Post-Acquisition Dispute: An Overview ■Illustration of a hypothetical Seller’s perspective and Buyer’s perspective − 15 −

16 Background of a Purchase Price Dispute ■An acquisition price may reflect a negotiated or implicit valuation multiple of earnings/EBITDA between a Buyer and a Seller ■As a consequence of the transaction, there is a negotiated mechanism in the purchase agreement to “true-up” the balance sheet acquired by the Buyer ■Usually, the parties are entitled to the following post-closing adjustments: ■GAAP adjustments ■Other “dollar for dollar” adjustments provided for in the agreement ■The Buyer may additionally or alternatively be entitled to: ■“Benefit of the bargain” damages, if there is a material misrepresentation of the financial statements by the Seller − 16 −

17 The Role of a CPA in a Post- Acquisition Dispute ■As an Expert ■As an Arbitrator ■As a Mediator ■As Advisor to the Attorney as Arbitrator − 17 −

18 Post-Acquisition Dispute – An Overview ■Seller’s Representation ■“GAAP” vs. “ Consistency” ■Subsequent Events ■Comparison of the Seller’s perspective vs. Buyer’s perspective − 18 −

19 Seller’s Representation “The financial statements present fairly, in all material respects, the financial position of the business, as of the respective dates thereof and covered by said statements in accordance with generally accepted accounting principles consistently applied throughout the period involved.” 19

20 “GAAP” vs. “Consistency” ■The most hotly contested issue in a post-acquisition dispute ■Seller’s position is that a consistent/past practice, which results in a GAAP presentation, is a winning strategy at trial ■Buyer’s position is that Seller’s past practice is not GAAP and seriously understates the reserve/accrual/presentation ■If Seller’s past practice/methodology does not result in a GAAP presentation, then GAAP would probably trump consistency (depends on the facts and circumstances of the case) − 20 −

21 Subsequent Events ■A hotly contested issue ■In general, the Arbitrator would consider what is known or knowable at the date of the closing balance sheet. In addition, the Arbitrator is often asked to consider: ■What is known or knowable at the date of the preparation of the closing balance sheet, or “report date” ■Whether later subsequent events indicate that the Seller’s position is unreasonable regarding what was known or knowable − 21 −

22 Seller’s Illustration of a Hypothetical Seller’s Perspective vs. Buyer’s Perspective ■Past practice/consistency will result in a GAAP presentation/Seek a specific “carve out” of problem accounts ■Extensive access to Buyer’s books & records, ability to make copies, interview personnel ■Seek to negotiate a basket or threshold for post-closing adjustments and indemnity claims − 22 −

23 Seller’s, Continued Illustration of a Hypothetical Seller’s Perspective vs. Buyer’s Perspective ■Limit escrow ■Seller’s accountants should prepare closing balance sheet ■Consistency is retroactive to the Target Balance Sheet (TBS) and offsetting to claims in the CBS ■Define losses to be dollar for dollar, exclude lost profits and diminution of value and a multiple of EBITDA ■Define purchase price as a multiple of EBITDA − 23 −

24 Buyers Illustration of a Hypothetical Seller’s Perspective vs. Buyer’s Perspective ■Negotiate a mechanism in the contract to increase or decrease the purchase price based upon EBITDA fluctuation before the close ■Losses would include lost profits, diminution in value, and a multiple of EBITDA or other relevant measures ■GAAP trumps consistency ■Asserts a very conservative GAAP position/no “carve out” of any accounts − 24 −

25 Buyers, Continued Illustration of a Hypothetical Seller’s Perspective vs. Buyer’s Perspective ■Limit the Seller’s access to Buyer’s books & records/copies/interviews ■Limit basket/threshold issues of any kind ■Set up adequate escrow ■Buyer’s accountants should prepare closing balance sheet ■Buyer seeks a specified amount of net assets − 25 −

26 Chapter 3: Earnout Provisions and Disputes

27 What is an Earnout? A CONTINGENT element of the acquisition’s purchase price determined post-closing based on the target business performance against certain contractually defined criteria or benchmarks. 27

28 What is an Earnout? 28 Illustration of Earnout as Component of Total Purchase Price Closing Consideration – 12/31/09 $100 +/- Net Working Capital Variance from Peg – 2/28/ Earnout Amount – 12/31/10 10 Total Purchase Price $115 Where 2010 EBITDA was $22 million, and the Earnout Amount is defined by the Earnout Agreement to equal 5x EBITDA during 2010 in excess of $20 million.

29 Why do Parties to Deals Utilize Earnouts? Effective negotiating tool when differing perspectives on value and/or outlook for the target business 29

30 Why Do Earnouts Appeal to Sellers? ■Protect Seller from failing to realize value in their business. ■May allow Sellers to obtain greater consideration that they might receive otherwise. ■Can be advantageous in difficult economic climates (such as today). ■May allow Seller to control its own destiny when Seller management will continue to be involved in business post- closing. − 30 −

31 Why Do Earnouts Appeal to Buyers? ■Protect Buyer from overpaying for the target business. ■Effectively Seller financing – reduces cash necessary at closing. ■Can distinguish Buyer’s bid when there are multiple suitors for target. ■Indicates confidence of Seller. ■Motivation of Seller management when Seller management will continue to be involved in business post-closing. − 31 −

32 Buyer-Specific Considerations May restrict integration of target. May indicate uncertainty. Concern of compensating Seller for Buyer enhancements. Fear of manipulation of earnout by Seller management. Seller-Specific Considerations Lack of control of business. Lack of custody of records. Fear of manipulation of earnout. Concern that value in business will not be realized. Why Don’t Parties Utilize Earnouts? 32 Shared concerns of the Buyer and Seller Ability to “move on” post-closing. Difficulty of administration post-close. Challenge of negotiating for all contingencies. Fear of post-acquisition disputes.

33 Mechanics of Earnouts

34 34 Financial Benchmarks: Income Statement Measures Seller’s Negotiating Preference Buyer’s Negotiating Preference

35 Common Disputes Involving Earnouts

36 36 Measurement of Business Performance Post- closing Accounting Post- closing Conduct of Business

37 Areas of Dispute Regarding Operation of Target ■When business is operated by Buyer post-closing… ■Perceived management of business to minimize performance measures and in turn the earnout. ■Alleged deviation from consistent historical operating norms. ■Alleged failure to invest in the business / provide for adequate capital. ■Alleged failure to pursue opportunities. ■Alleged impairment of earnout due to discontinuation of business. ■Alleged shifting of sales or customer relationships from target to other Buyer entities. ■When business is operated by Seller management post-closing… ■Perceived management of business to maximize performance measures and in turn the earnout. − 37 −

38 Disputes Regarding Accounting Areas Prone to Dispute in Earnout 38 What should / should not be included when measuring the target’s performance against earnout benchmarks?

39 Valuation of Earnouts in M&A Transactions

40 Valuation of Earnouts ■Old Standard – any expected contingent consideration would be recorded when earned ■Revised Standard (SFAS 141R) – any expected contingent consideration is measured at Fair Value ■Recognized at the acquisition date ■Re-measured annually until all contingent consideration is paid − 40 −

41 Valuation of Earnouts, Continued ■Sample Facts: ■Deal price – $1.8 billion ■EBITDA – $100.0 million ■Contingent Consideration Earnout: ■ 50 percent of every dollar of EBITDA that exceeded $100.0 million ■ Term of Earnout – 2 years ■ Earnout Cap – $40.0 million − 41 −

42 Valuation of Earnouts, Continued 42 Scenario Approach: Year 1Year 2 EBITDA$120.0$125.0 Earn-out bonus Discount rate15.0% Present value factor [a] Present value of earn-out payment$9.3$10.1 Value of contingent consideration$19.4 Year 1Year 2 Scenario Likelihood EBITDA (Best Case)$150.0$ % Earn-out bonus EBITDA (Base Case) % Earn-out bonus EBITDA (Worst Case) % Earn-out bonus00 Weighted average earn-out bonus Discount rate15.0% Present value factor [a] Present value of earn-out payment$8.2$9.6 Value of contingent consideration$17.8 [a] Calculated using the “mid-year convention,” which assumes that cash flows will be received evenly throughout the projection period rather than at the end of the period. Example: Buyer’s Projected EBITDA:

43 Chapters 4 & 5: Material Adverse Change Clauses and Representation and Warranty Disputes

44 Material Adverse Change, Measuring Damages, and Related Pitfalls

45 Standard Material Adverse Change Clause Purchase and Sale Agreements typically include a Material Adverse Change (“MAC”) clause containing language similar to the following: ■Material Adverse Change: ■Any event, development, circumstance, change or effect that is or would reasonably be expected to be materially adverse to the business, financial condition or results of the operations of the Acquired Company − 45 −

46 Standard Material Adverse Change Clause, Continued Purchase and Sale Agreements typically include a Material Adverse Change (“MAC”) clause containing language similar to the following: ■Representation of Seller ■Since date XX, there has not been any Material Adverse Change in the business, operations, properties, prospects, assets, or condition of any Acquired Company, and no event has occurred or circumstance exits that may result in such Material Adverse Change. − 46 −

47 What is a Material Adverse Change (MAC)? Based on VC Strine’s ruling in this case, a MAC may have been sustained if: 1.Dramatic downturn in earnings from the date of the signing of the SPA and before the closing. 2.There is a downturn in the business that is disproportionate to the industry. 3.The downturn is durationally-significant (or over a commercially reasonable period), meaning years and not months (is the downturn a blip or a trend?), and 4.The change in the business in unknown to the Buyer. − 47 − IBP, Inc. v. Tyson Foods, Inc.

48 Benefit of the Bargain Damages Benefit of the Bargain: A measure that awards the plaintiff the difference between the gain had the misrepresentations been true and what the plaintiff actually received Litigation Service Handbook, Fourth Edition, 18.7

49 Measuring Damages: Indemnity Claims Indemnity Claim: A dollar-for-dollar measure of the difference between what was “bargained for” versus what was received if affect earnings into the future. 49

50 Measuring Damages: Example #1 ■Assumptions: ■$10 MM of undisclosed and unrecorded one-time liability associated with environmental remediation costs ■Potential liability known to Seller during negotiations, but not disclosed ■Not probable/reasonably estimable at time of negotiations or at time of close ■Purchase price of $750 MM ■ EBITDA of $150 MM ■ 5x Multiple − 50 −

51 Measuring Damages: Example #1 ■Observations on Measuring Damages: ■Buyer did not contemplate these costs in its valuation ■Based on fact pattern, non-recurring impact on future earnings ■Appropriate measure of damages likely dollar-for-dollar to reflect gain Seller would have received “but for” misrepresentation/failure to disclose ■Reduce purchase price by $10 million to $740 MM − 51 −

52 Measuring Damages: Example #2 ■Assumptions ■Significant customer lost just prior to closing ■Customer loss not disclosed to the Buyer − 52 −

53 Measuring Damages: Example #2 ■CPA should consider: ■Value of the customers to the business (i.e. contribution margin, operating profit, or customer EBITDA) ■Target company’s customer turnover rate ■Can customer be replaced? ■Impact on long-term capital structure ■Will loss impact only a few periods or extend into perpetuity? − 53 −

54 Measuring Damages: Example #2 ■Observations on Measuring Damages: ■If part of ordinary customer turnover, possible that no damages incurred. ■If unprofitable customer, possible that no damages incurred. ■If profitable customer with finite life with the Company, damages may be appropriate over customer life. ■If profitable customer into the future, damages measured by valuation excluding cash flow from customer may be appropriate (e.g. impact on earnings x deal multiple) − 54 −

55 Pitfalls to Avoid in Assessing Damages ■Analyze PSA and contemporaneous documents carefully to understand Buyer/Seller motivations and key data to parties. ■Assess situations involving double recovery carefully. ■Indemnity claim v. working capital claim ■Interplay of contractual overlays v. GAAP working capital requirements ■Consult with counsel in matters requiring contract interpretation. − 55 −

56 Pitfalls to Avoid in Assessing Damages, Continued ■One time losses do not result in permanent earnings impairments and should not result in damages at a multiple. ■Only claims resulting in ongoing or permanent impairment to the target company’s earnings warrant consideration of “at the multiple” benefit of the bargain damages. ■A post-close analysis of the deal may establish that Buyer received benefit of its bargain irrespective of an alleged breach. − 56 −

57 Case Study

58 Facts of the Case ■Valassis and ADVO are in the direct mail advertising business. Each company had sales in excess of $1B. The combined entity will exceed $2.65B in sales. ■Late in 2005 Valassis commenced merger discussions with ADVO. ■On July 7, 2006, Valassis and ADVO signed the SPA, whereby, Valassis would pay $37/share in cash. − 58 −

59 Facts of the Case, Continued ■PRIOR to the signing of the SPA, ADVO represented: ■Forecasted operating income for FY2006 of $68 million; ■The integration of their SDR computer system was progressing as planned; ■That the April & May 2006 financial statements were materially correct. ■The SPA is signed on July 5, − 59 −

60 Facts of the Case, Continued ■AFTER the signing of the SPA: ■ADVO disclosed that April and May’s 2006 financial statements were misstated by $2.6M; ■August 10, 2006, ADVO adjusted its $68 million forecasted operating income to $54.8 million, nearly identical to an internal April 2006 forecast of $54.5 million; ■Actual FY results ending 9/30/06 were $37.9 million, some $30 million below expectations. ■Negotiations stalemated. On October 31, 2006 Valassis filed suit to rescind the merger. − 60 −

61 Assignment ■Investigate the following allegations: ■Financially speaking, did ADVO’s business suffer a material adverse change? More specifically: ■ Was ADVO’s EBITDA materially misstated? ■ Did ADVO sustain an dramatic downturn? ■ Was ADVO performing disproportionately below its peers in the industry? ■ Was ADVO’s downturn known to the buyer prior to closing? ■Did Valassis obtain the benefit of its bargain? − 61 −

62 Demonstration of Dramatic Downturn

63 Declined 70% From Q to Q ADVO’s Recent Operating Income is Below the Historical Mean 63 5M 10M 25M ($) in Millions 20M 15M Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q $20.0 $18.7 $21.6 $21.3 $19.8 $19.0 $20.7 $21.6 $14.1 $18.5 $22.4 $14.1 $22.1 $12.6 $11.6 $7.0 Mean = $19.5 (1) (2) (3)

64 ADVO’s Material Misrepresentation

65 ADVOS’s Fiscal Year 2006 Operating Income Forecasts M 20M 30M 60M ($) in Millions 40M 80M 50M 7/6/2006 Merger Agreement $76.1 (Original Budget) 70M $54.5 $65.0 $68.6 $68.0 $54.8 $37.9 4/14/20065/4/2006 5/10/20066/23/20068/10/2006 Actual (unaudited)

66 ADVO’s Operating Below Industry Expectations

67 ADVO’s Performance is Disproportionate to the Industry Q1Q2Q3Q4Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 5M 10M 15M 25M 20M 30M 35M 40M $38.1 $37.4 $32.2 $35.3 $36.3 $37.3 $36.6 $37.4 $35.9 $37.2 $37.1 $35.3 $35.8 $35.1 (4.3)% Change (69.5)% Change $14.1 $20.6 $10.3 $18.7 $21.6 $21.3 $25.6 $23.1 $23.2 $21.6 $18.5 $25.9 $14.1 $6.3 Industry Average* ADVO ($) in Millions Time between Q1 & Q4 $9.2 (2) Q1Q2Q3Q4Q2Q3Q4Q1Q2Q3Q4Q1Q2Q Q4

68 Valassis Did Not Receive the Benefit of its Bargain 68 Purchase Price Overpayment Calculation In Millions (except multiples) Pre-Signing Forecasted Fiscal '06 Op. Income - Misrepresentation $68.0 Less: Pre-Signing Forecasted Fiscal '06 Op. Income – Realistic(54.5) Operating Income Misrepresentation $13.5 % of Misrepresented Operating Income 19.9% ADVO '06 EBITDA (Valassis/Bear Stearns Projection) $119.0 Less: Misrepresentation(13.5) Corrected ADVO '06 EBITDA $105.8 EV/EBITDA Purchase Price Multiple 9.0x Adjusted Enterprise Value $950 Less: Actual Enterprise Value Purchase Price (1,291.3) Purchase Price Overpayment $(341.8) % of Actual Purchase Price 26.5% 9.0x Multiple

69 Valassis Did Not Receive the Benefit of its Bargain - ADVO Misled Valassis into Overpaying by $300 - $400 Million ($) in Millions 69 Multiple of EBITDA Based on Guideline Companies Value at July 5, 2006$1,291 FY 2006 EBITDA$105.5 Multiple9.0x Value at August 10, ( $342) Income Approach (Free Cash Flow) Value at July 5, 2006$1,080 Value at August 10, ( $404) (3) (1) (2)

70 Chapter 6: The Role of the Accounting Neutral

71 Role of the Accounting Neutral ■Overview: The Role of the Accounting Neutral in M&A ■The Purchase Price Agreement: The Accounting Neutral’s Role is Created and Defined ■The Engagement Process: Accounting Neutral and Buyer/Seller Considerations ■Key Considerations During the Arbitration Process ■Common Working Capital Dispute Items Adjudicated by the Accounting Neutral ■The Accounting Neutral’s Final Opinion and Overall Engagement Performance − 71 −

72 The Role of a CPA in a Post- Acquisition Dispute 72 CPA Roles Expert Consultant ArbitratorMediator Advisor to the Attorney as Arbitrator

73 Overview ■Certified Public Accountants are often asked to serve in the role of neutral in resolving disputes between parties arising from merger and acquisition transactions. ■The most common scenarios are those in which the accountant will resolve purchase price disputes and earn-out disputes. ■Applicable sale/purchase agreements contract clauses include: ■Purchase Price ■Working Capital or other adjustments ■Earn-out provisions ■Financial representations and warranties − 73 −

74 What is the Accounting Neutral’s Role? ■A variety of terms are applied in purchase/sale agreements: ■Expert Determination ■Arbitrator ■Arbitrating Accountant ■Independent Accountant ■Neutral Accountant ■Bottom line: It is the neutral accountant’s role to render a decision on the disputed items. But where does one start? − 74 −

75 Typical Arbitration Process ■Generally, there are no set guidelines for how to conduct the process ■Should consider that some contracts may refer to third-party guidelines such as AAA or CPR Institute of Dispute Resolution rules ■The actual process may take various forms depending on what the parties agree to (i.e. baseball arbitration) − 75 − Preliminary Conference DiscoveryWritten StatementsInterrogatoriesHearings/ConferencesDecision/Award Common elements of the arbitration process:

76 The Purchase Price Agreement: The Accounting Neutral’s Role is Created and Defined

77 Drafting Acquisition Documents ■Anticipate Potential Areas Of Dispute ■Know Client’s Interests ■Predict Potential Liabilities/Claims ■Dispute Notification − 77 −

78 The Dispute Resolution Provision ■Forum/Jurisdiction ■Discovery ■Timeframe ■Segregation of Issues ■Cost Shifting/Fee Shifting − 78 −

79 The Engagement Process: Accounting Neutral and Buyer/Seller Considerations

80 Accounting Neutral’s Engagement Process ■Parties/counsel to obtain Accounting Neutral candidate resumes ■Conduct interviews of Accounting Neutral candidates ■Contact Accounting Neutral candidate references ■Inquire about Accounting Neutral candidate fee structure ■Confer with opposing party/counsel to determine top candidate choices − 80 −

81 Neutral’s Considerations: Accounting Neutral’s Engagement Letter ■Common elements of neutral engagement letters include: ■Identification of the contract from which the dispute arose ■Identification of the specific disputed issues within the neutral's scope ■Confirmation of absence of known conflicts of interest and disclosure of existing or prior relationships ■Right to resign if conflicts arise that would impair independence or impartiality ■Disclaimer that the services are not an audit − 81 −

82 Neutral’s Considerations: Accounting Neutral’s Engagement Letter, Cont. ■Common elements of neutral engagement letters include (cont.): ■Hold-harmless clause giving the accounting neutral’s quasi-judicial immunities ■Identification of the neutral individual and team members ■Description of agreed upon format/process for the proceeding ■Description of the form of award/report the neutral will issue (baseball arbitration vs. ability to dictate a different number) ■Description of fee and billing arrangements – also state that fees will be collected before issuing the decision − 82 −

83 Parties/Counsel’s Considerations: Accounting Neutral’s Engagement Letter ■Accounting Neutral’s Scope ■Issues To Be Resolved ■Schedule ■Description of the form of award/report to be issued ■Costs – Controlling the Accounting Neutral ■Conflicts − 83 −

84 Preliminary Conference ■Gain an understanding of the disputed issues ■Discuss expected procedures ■Set schedule for the proceedings with specific dates and locations, if necessary − 84 −

85 Hearings/Conferences ■Does there need to be a hearing? ■Mixed in practice as to whether or not there will be a hearing. ■Adds a significant cost component ■Often has a significant impact on the timing of the decision ■What is the perceived value? ■The parties can agree to a hearing up front or can agree to address the need for a hearing later in the process. ■A common approach is to allow for a hearing if either of the parties or the neutral requests one. − 85 −

86 Common Adjustment Dispute Items Adjudicated by the Accounting Neutral

87 Post-Acquisition Disputes – An Overview ■“GAAP” vs. “ Consistency” ■Subsequent Events ■Earn-outs ■Common Financial Statement Account Disputed Items ■Comparison of the Seller’s perspective vs. Buyer’s perspective − 87 −

88 Common Financial Statement Disputed Items Adjudicated by Accounting Neutral ■Revenue Recognition ■Accounts Receivable Reserves ■Inventory: Excess/Obsolete Issues ■Asset Depreciation ■Capitalized Assets ■Accounts Payable ■Accrued Liabilities: Warranty Reserves, Contingent Liabilities − 88 −

89 The Accounting Neutral’s Final Opinion and Overall Engagement Performance

90 Reporting ■Form of decision letter should be as agreed upon by the parties per the engagement letter. ■The form of the final report can take many forms: ■One final number ■Final numbers for each disputed item ■Numeric finding for each disputed item including the basis or reasons for the neutral’s decision- “reasoned report” ■Arbitrator should consider ruling that the final decision not be released until all fees have been collected. ■Fee Allocation- final decision should provide a final fee allocation. ■Subsequent to the final decision, Arbitrator can allow for the consideration of any clerical, mathematical, or other errors of factual nature brought to attention by any interested parties. − 90 −

91 The Role of the Accounting Neutral: Concluding Remarks

92 The Role of the Accounting Neutral - Concluding Remarks ■Carefully consider the language drafted in the purchase price agreement regarding the role of the Accounting Neutral. ■Review and consider the qualifications of the Accounting Neutral before engagement. ■Accounting Neutral must consider the following before accepting the engagement: 1) Conflicts, 2) Appropriate level of expertise, and 3) Engagement letter language − 92 −

93 The Role of the Accounting Neutral - Concluding Remarks, Continued ■The actual process and timeline for arbitration will vary. ■Accounting Neutral may opt to perform his or her own analysis and procedures, exclusive of the parties written submissions. ■Most disputes pertain to GAAP vs. “Consistency”, Subsequent Events, and Revenue Recognition. ■Accounting Neutral will typically render a “reasoned report” at the request of the parties. ■Accounting Neutral needs to be aware of the professional standards and laws that govern this type of work. − 93 −

94 Questions Sample pie chart – 3D Pie 94

95 Thank You for Your Time

96


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