David's Blog | Misc ramblings about things in general, work and technical items of interest.

Apr/21

12

Share Purchase Agreement Working Capital

A second question is whether the balance sheet should correspond to GAAP and/or past verified statements of the target company – and who should govern in the event of a conflict. In GAAP-compliant approaches, there are large variations that must therefore be taken into account. It is also advisable to take into account the GAAP compliance insurance and guarantees that may apply to your transaction and possibly to the benchmark balance sheet, to ensure that there is no double counting or double counting. The Alliant Techsystems case, which we discuss below, is an example of what can happen when the final documentation leaves room for disagreement on the applicable accounting standard. The following business characteristics affect the normal amount of working capital: as noted above, it is important not to create an isolated working capital provision. The interaction of the provision with other provisions of the sales contract should always be taken into account, particularly with regard to the possibility of “double counting”. In Brim Holding Company, Inc. v. Province Healthcare Company (2008 WL 2220683 (Tenn. Ct. App. May 28, 2008) acquired Brim Holding Company, Inc. Brim Healthcare, Inc.

from the Province Healthcare Company. The seller agreed to compensate the buyer for an outstanding dispute. The buyer paid $US 50,000 to settle the dispute and demanded that amount below the compensation. However, the seller had put a reserve of US$50,000 on the balance sheet of the dispute and therefore defended the claim on the grounds that the amount was already covered. While admitting that the seller`s approach made sense, the Tribunal found that the documents supported double collection, since the compensation was intended to cover all damages and not just for an unreserved amount. Labour capital adjustment mechanisms are often a difficult negotiating point for both buyers and sellers under acquisition agreements, in part because they are at the intersection of corporate finance, accounting and law, but a knowledgeable buyer or seller can use the adjustment mechanism to support its pricing model and optimize any value transfers that may result. This requires close coordination between accountants, lawyers, in-house financial staff and the deal team. In response, we often see vendors who offer very specific and detailed accounting and valuation methods for calculating the extract, especially working capital. Instead of simply doing accounting and valuation methods “in accordance with GAAP,” vendors will continue to say “in accordance with past practices” and will often contain separate exposure to specific accounting and valuation methods that must be used in the development of the financial statement.

These specific accounting and evaluation methods are sometimes established as a hierarchy, which includes the specifically listed accounting and evaluation methods(1); (2) to the extent that it is not expressly stated in paragraph 1, all the methods, methods and methods of accounting and evaluation that are implemented in the making of the latest audited financial statements; and (3) to the extent that is not included in paragraphs 1 or 2 according to the provisions of the GAAP.

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