In aerospace and defense mergers and acquisitions the deal isn’t truly over when the purchase agreement is signed. Post-closing claims can quickly erode what seemed like a successful sale, costing sellers time, money, and peace of mind.
Post-closing disputes usually stem from buyers’ claims that information provided about the business during the sale process was incomplete or inaccurate. These include issues such as environmental spills, regulatory compliance, and working capital.
As mentioned in Deal Note 22®, working capital adjustments are frequent sources of post-closing contention. This common risk can be substantially reduced by addressing working capital calculations clearly and methodically in both the CIM and post-LOI due diligence. Another common area for dispute, separate but often interwoven into working capital disputes, is excess slowing moving and / or obsolete inventory (E&O). Because accounting rules allow for some flexibility in accounting for inventories, buyers can take a position on your E&O that conflicts with your historical accounting policies and procedures. If you and the buyer do not have an extremely clear understanding of how E&O will be treated, pre- and post-closing, this can (and often will) lead to a substantial post-closing dispute (as we discussed in Deal Note® 67).
Over the past 23 years we have learned that post-closing risks can be dramatically reduced by taking two critical steps: i) draft an extremely accurate and thorough Confidential Information Memorandum (CIM) and ii) be highly accurate and thorough in responding to all post-LOI buyer due diligence requests.
Having a deep understanding of the potential scale and scope of buyer claims is crucial to taking the necessary steps during a sale process to substantially reduce the risk of buyer claims post-closing.
Have a great day everyone,
Max McFarland
Associate
