Working capital and goodwill must be taken into account in the evaluation. These two components of the balance sheet have a relationship, usually reversed. Without worrying about how goodwill is deduced, a discipline of purchasing accounting, there is value within the company mainly assets. In other words, value is a premium part of the company`s value. The benchmark balance sheet, which is often attached to the working capital adjustment schedule, can pose a problem of consistency. While the inclusion of such a balance sheet generally helps to ensure consistency of calculations, it is important to include all positions for which an adjustment is expected, including those that may have a zero balance when calculating the objective. Otherwise, there may be a dispute as to whether these positions should be completely excluded or whether they were excluded solely because they had a zero balance at the time the objective was calculated. Adding an example of NWC calculation as a schedule to the sales contract can also be very helpful in minimizing litigation. Here`s how both parties to a business acquisition can protect the value of their business from closing working capital fluctuations.
As noted above, it is important not to establish a working capital provision in isolation. 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. The potentially broader effectiveness and applicability of this approach has not gone unnoticed. The parties to the transaction quickly began using working capital adjustments to address other types of transaction uncertainties. In today`s competitive environment, where purchase prices are often set before due diligence is concluded (for example. B during an auction process), working capital adjustments are often used as a means to determine the final purchase price and not just as a means of adjusting the price up or down, to compensate for generally minor deviations in the cash position of the target transaction at the time of closing. In the event of an intervention by an audit firm in dispute, the parties should consider potential conflicts of interest and determine whether the commissions of the designated entity would be proportional to the expected amount of an adjustment at issue. The power of the designated audit firm should be limited only to the issues and the resolution of the contentious elements in the area of the values claimed by the parties. The arbitrator`s accountant`s decision on the contentious elements and the amount of the correction is generally final and binding. As a general rule, the arbitrator`s fees are allocated in proportion to the amount of the disputed adjustment that is resolved for and against each party.