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Support for the design of share purchase agreements and earn-out mechanisms

SPA, earn-out and completion accounts - support for M&A transactions

A Share Purchase Agreement (SPA) is an M&A transaction document that has lawyers on both sides. But key financial provisions in the SPA - regarding the price settlement mechanism, seller representations, post-closing price adjustments and earn-out mechanisms - require as much precision from a financial expert as from a lawyer.

Imprecise or misconstrued financial provisions in SPAs are a ready recipe for post-transaction disputes. Contracts written by lawyers without the involvement of a financial advisor often contain key accounting terms used in a way that opens up space for diametrically opposed interpretations - and leads to costly arbitrations. We have repeatedly been involved in such disputes after the fact. We prefer prevention.

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How do we help?

- We work with the law firm handling the M&A transaction, focusing exclusively on the financial and accounting aspects. We verify and edit:
  
  the pricing mechanism (locked box vs. completion accounts) and the rationale for the choice,
  
  definitions of key terms (debt, cash, working capital, normalized EBITDA) - so that the terminology is accounting precise and unambiguous,
  
  provisions for seller's representations (representations & warranties) on finance and accounting,
  
  clauses on price adjustments and post-closing settlements.
- Earn-out is one of the most difficult transaction tools to construct. The payment depends on the future performance of the company, which is influenced by the buyer after the acquisition. Poorly defining the underlying ratio (EBITDA? revenue? net income?), measurement period, accounting rules and mechanism to protect against manipulation of results can lead to years of disputes.
  
  We help design an earn-out mechanism that is:
  
  based on an indicator that is actually measurable and resistant to management manipulation,
  
  defined with accounting precision, not just legal precision,
  
  secured with clauses that protect both parties from unfair influence on the outcome.
- When theSPA provides for apricesettlement mechanismbased on completion accounts, the parties need assurance that they will be prepared strictly in accordance with the principles described in the agreement -neither moreconservatively nor moreaggressively. We prepare completion accounts as an independent party, ensuring compliance with SPA methodology and neutrality to both parties to the transaction.
- If a deal has already closed and there is a dispute over the value of the earn-out ratio or price adjustment, we help the buying or selling side prepare a position based on data and accounting methodology.
  
  We have participated in negotiations on both sides of the transaction. We also support clients in disputes over warranty claims and interpretation of SPA financial records.

For whom?

For owners selling a company who want to be sure that SPA provisions protect their financial interests,
For private equity funds and strategic buyers who want to reduce the risk of post-transaction litigation,
For law firms seeking specialized financial support for SPAs and M&A transactions,
For parties to a dispute over earn-out settlement, price adjustments or warrant claims.

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FAQ

- SPA (Share Purchase Agreement) is a share purchase agreement used in M&A transactions. It regulates the terms of the acquisition of the company, how the price is determined, and the rights and obligations of the parties.
- Earn-out is a transaction mechanism in which part of the sale price of a company depends on the achievement of certain financial results after the transaction closes.
- Completion accounts are a post-trade price adjustment mechanism based on the company's actual financial position at closing.
- Locked box bases price on historical financial data and limits subsequent adjustments. Completion accounts allow the price to be settled based on actual data at the time the trade is closed.
- Imprecise definitions of EBITDA, net debt, working capital or earn-outs can lead to costly disputes and post-closing arbitrations.
- The support of a financial expert is especially important when designing earn-out mechanisms, completion accounts, warranty claims and post-transaction price adjustments.