Many a sale and purchase transaction has been sealed with the popping of champagne corks. But the euphoria may be short lived if the buyer subsequently feels it hasn’t got the business it bargained for. The beginning and end of such disputes can be the sale and purchase agreement (“SPA”). It contains the provisions governing the deal including the mechanisms for resolving subsequent disputes.
This is one instance where the world of law and the world of accountancy meet and where a forensic accountant can provide assistance to buyers or sellers and their legal advisers.
One of the key questions usually concerns the net assets shown in the completion accounts. The transaction price in the agreement may well be subject to later adjustment if the assets purchased are judged to be deficient.
But how can this be? SPAs specify the way in which the more contentious items in the balance sheet are to be valued in the completion accounts and for less contentious items the SPA will usually require consistency with the previous audited financial statements or otherwise the application of Generally Accepted Accounting Principles (“GAAP”).
It is typically where there is a need to apply commercial judgements to derive amounts for inclusion in the completion accounts that the accounting concerned can be more art than science. Whilst it may not be easy to resolve such matters, forensic accountants do have a clear understanding of the need to work within the terms of the SPA and can provide help throughout the lifecycle of negotiations between the parties.
At the outset, one or both of the parties or their legal advisers may choose to retain accountants to help with understanding the practical impact of the proposed accounting clauses. Such analysis may often provide clients with an ‘early warning system’ on accounting issues. The accountants’ work may help the lawyers decide whether changes to the drafting of the SPA are necessary to mitigate the risk of either party misunderstanding the basis on which such contentious items are to be included in the completion accounts.
Then, when the time comes to draw up the completion accounts, forensic accountants can help ensure the focus remains on accounting for items as per the agreed SPA. Similarly when the other party receives the completion accounts, forensic accountants can be a useful component of the team which critiques the basis on which items have been included in the completion accounts. The parties may then decide that they wish to negotiate over differences of interpretation and measurement of the disputed items and buyers and sellers often retain forensic accountants to provide support and analyse the effects of offers and counter offers.
Should the parties not agree, they may decide to refer the disputed matters to an independent accountant for determination. The sale and purchase agreement terms usually make provision for this and the parties jointly engage the independent expert and agree to be bound by his or her decision except if there is a manifest error in the determination. Forensic accountants can help the parties draft the submissions they will need to put to the independent expert and gather the evidence to support these submissions. The forensic specialist will be able to advise on the way to present the evidence and arguments on accounting matters within the context of the terms of the SPA.
Of course, there will also be warranties concerning financial information and the buyer may feel it can sue on the strength of warranties given by the seller. A common example is where management accounts covering the period since the last audited financial statements are warranted as “fair and reasonable” or “reasonable and accurate” or on some similar basis. This wording used is often not “true and fair” since this pertains to the statutory audited financial statements. Here again is scope for interpretation of wording concerning the accounts, which often entails the forensic accountant working with lawyers to provide a client with advice on the merits of a breach of warranty case.
So after the deal is done, there remain many pitfalls that may undermine the successful sale and purchase of a business. Often a combination of accountancy and legal skills are required to help overcome these pitfalls and help bring about a successful resolution to a dispute. The skill of the forensic accountant is to apply accountancy knowledge in the context of the SPA terms and warranties. Working alongside the client and legal advisers, the accountant can help, from looking at the commercial impact of proposed terms in the SPA through to assisting during the expert determination process or looking at breach of warranty claims.