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When buy-outs turn sour because of the final figure

by DAVID BUNKER AS AN ACCOUNTANT, there are few commercial matters which are more disappointing than to see a management buy-out descend into a dispute between buyer and seller. After all, the transaction nearly always starts with the best of intentions; the existing owner is desirous to sell and is often anxious to see the management team which has helped to develop a business have the opportunity to take it on and profit directly from their hard endeavours.

The existence of a ready-made purchaser has other obvious benefits to the seller: certainty, the lack of selling agent costs and a saving in time among them. For those reasons the terms offered to the purchaser are often beneficial. Either the purchase price is discounted or the terms for payment of the price are extended.

But those very factors contain within them the elements which can often lead to disputes. Firstly, there is a lack of detachment between the two sides. The purchaser is too inclined to take the word of the seller, the former boss of the business, and reluctant to seek independent advice concerning the value to be placed on the business or the terms that are being offered.

Secondly, the two sides are over familiar and do not treat each other with the healthy scepticism which is prudent between seller and purchaser. Thirdly, they do not commit to writing as much of their agreement as they ought. Many disputes arise between well meaning parties who both thought they understood what the other meant, only to be proved wrong at a crucial stage.

As an independent expert, the point at which I tend to get called in is when there are disputes over completion accounts. It is very common for the purchase price of a business to be dependent upon the final trading results of the business, which will only be ascertained after the deal has been done. The purchase price is therefore frequently conditional and subject to the final trading results. The completion accounts then become of pivotal importance.

In those situations the accounts are prepared by one side, usually the selling party, and then presented to the other side for comment. By its very nature the arrangement is adversarial. In the particular circumstance of a management buy-out there is the other element of an imbalance of power; the seller effectively controls the production of the figures and expects to be paid out on the basis of these figures.

Some of the areas of dispute are factual and can be settled relatively easily by an independent expert; for instance, it is easy to check whether the accounts understate creditors, or fail to make provision for bad debts. The expert has the opportunity to look at the accounts, with detachment, at some remove of time, and will normally be able to settle those matters. The more difficult areas are those involving an element of judgement.

A particular area of concern is the apparent conflict between accounting principles and consistency. It is generally the case that the sale and purchase agreement will specify that the completion accounts will follow generally accepted accounting principles and will be drafted in a manner consistent with previous years. But what if it transpires that the accounts have been consistently prepared in a manner which is not in accordance with generally accepted accounting principles?

For instance, the business might be accounting for contract income in an idiosyncratic way. If it has applied its policy consistently, would it really be appropriate to change it in the completion accounts? After all, the purchase price has been agreed on the basis of historic accounts drafted upon the historic basis. The new management are free to change accounting policy going forward, but do they have a right to make a retrospective alteration to the completion accounts? There is no simple answer to this question.

It is issues such as this which makes the work of an independent expert so interesting.

• David Bunker is a chartered accountant and commercial arbitrator specialising in company shareholding and partnership disputes. He can be contacted at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Last Updated on Tuesday, 16 October 2012 10:41