Transaction Dispute Causes and How an Independent Accountant Can Help

Low interest rates, buyers sitting on record levels of investable cash, and a shortage of sellers are key factors driving one of the most competitive mergers and acquisitions (M&A) markets in recent history. In the rush to grab opportunities as they arise, key details often get left out of the purchase-agreement terms. This can result in expensive litigation when the parties discover unpleasant surprises after the agreements are signed.

The following is an exploration of common transaction discrepancies, considerations to improve your purchase agreement, and how an independent accountant can help companies resolve these issues. 

Closing Adjustments Trends

Parties have been dedicating increasing amounts of attention and time to defining closing adjustments to limit the amount of latitude buyers and sellers have when coming up with post-closing calculations. Typically, most transactions are based on the company being delivered with the following criteria:

  • On a cash-free, debt-free basis
  • With a normal level of net working capital (NWC) needed to operate the business without additional contribution
  • With each party paying their own transaction expenses, such as advisor fees, brokers’ commissions, or spreads

At times, parties use earn-out provisions, a contractual agreement to pay some or all of the purchase price if certain milestones are achieved post-close, to bridge the valuation gap. As such, parties could potentially need to reconcile five or more accounts and items after the transaction.

The cash, debt, and transaction expense components are typically easier to reconcile. NWC calculations and earn-out provisions, however, require more definitions and precision due to the number of accounts included in their determination. To address these potential complications, parties can define NWC and the earn-out provision, including a sample calculation, in the purchase agreement.

Common Causes of Closing Adjustment Disputes

The causes of a dispute can vary between NWC closing adjustments and earn-out provisions. Following are examples of how the lack of specificity can lead to confusion.

NWC Adjustments

For NWC, lack of description regarding how the accounting estimates, such as bad debt expenses and inventory reserves, are calculated often results in disputes.

Too often, the buyer and seller rely on a general definition stating that the earn-out and NWC calculations are prepared in accordance with generally accepted accounting principles (GAAP). However, GAAP provides the framework for certain accounts but not the formula.

For example, GAAP requires that accounts receivable (AR) be valued at net realizable value, meaning net of potential bad debts; however, GAAP doesn’t specify how the bad debt reserves should be calculated.

Earn-Out Provision Adjustments

For earn-out provisions, the duration of the earn-out provision and post-close changes in business and operations often result in disputes. Typically, earn-out provisions are for longer periods—anywhere from one to multiple years—which makes it difficult to account for various business changes when calculating the provisions.


Too often, the buyer and seller rely on a general definition stating that the earn-out and NWC calculations are prepared in accordance with generally accepted accounting principles (GAAP). However, GAAP provides the framework for certain accounts but not the formula.

Additionally, buyers’ overhead structures often differ from sellers’ overhead structures, resulting in additional expenses that could be omitted in the initial calculation.

How to Improve Purchase Agreements

Well-written agreements prepared for M&A transactions specify the conditions required to execute the transaction. Effective agreements proactively consider, and thoroughly evaluate, potential issues that may arise after the transaction closes. To lessen the chance of a dispute and improve an M&A agreement, consider the following when preparing the agreement.

5 Ways to Proactively Avoid Potential M&A Issues

  1. Avoid vague terminology
  2. Delineate financial reporting and other cutoff deadlines
  3. Include calculation methodology examples or descriptions for commonly disputed areas
  4. Complete buy-side or sell-side due diligence before a transaction
  5. Work with experienced M&A legal advisors who collaborate closely with the accounting and tax diligence team on the transaction

Independent Accountant Dispute Resolution

In some cases, disagreements can be quickly resolved through the buyer and seller reaching a compromise. In other situations, disagreements may escalate, leading to disputes.

When the parties can’t agree on the closing adjustments, the purchase agreement describes the resolution process, which in most cases refers the matter to an independent accountant. The role of the independent accountant is to provide an objective, unbiased, and conflict-free determination of the closing-adjustment accounting based on the purchase agreement. 

The determination is based on the purchase agreement contract regardless of intent or fairness. Typically, the purchase agreement states the independent accountant determination should be within the range presented by the parties; meaning the independent accountant typically can’t conclude lower or higher than the disagreement range.

Preparing for a Closing Adjustment Dispute

To smoothly resolve an adjustment dispute, it’s important for the buyer and the seller to approach the conflict in the following ways:

  • Respect the purchase agreement process by not missing any deadlines
  • Approach a deal dispute just like a transaction or financial audit and eliminate the emotional aspects as much as possible
  • Engage professionals and seek guidance
  • Document any agreements or addendums pertaining to the dispute post-close

Often, parties work under the sense that allowing time to pass will fix the conflict, which is rarely the case.

We’re Here to Help

If you have questions about improving your purchase agreement or need assistance preparing for a deal dispute , please contact your Moss Adams professional. For more details, see our sell-and buy-side due diligence and merger integration web pages.