12 Jul Navigating Undisclosed Liabilities Before, During, and After Close
When looking at the M&A process, signing the definitive agreement is an exciting time. Due diligence from the buyer has been completed, everyone’s agreed to the terms, checks are signed, and life as part of a new company is about to start. However, there are times in which not all parts of the business are known. There could potentially be undisclosed liabilities, but there is also a true up period. In this episode we are diving into each of these areas.
It is very common that new, undocumented liabilities appear post the closing of a transaction. Some due to timing and others due to issues with transparency within the selling organization. In this episode we will discuss the mechanism we put in place to account for these unplanned expenses.
Some questions we answer:
- What is a true-up and some examples?
- What are representations and warranties? Is that an entirely separate issue?
- Sandbag clause in reps and warrants
- What’s the difference between hitting an earn-out and a true up?
- What remedies does a buyer have if there are unnamed liabilities?
- How does the buyer minimize risk?
- Are there insurance policies that can aid smoothing out potential liabilities
- A few scenarios that we’ve encountered in the past.
- Why they happen
- Not everyone is involved in the M&A process (example: sales may not have disclosed a client dispute to leadership)
- We discuss this in detail in previous episodes (32 and 33 who should be involved)
- Thought to be immaterial but liability grew
- How we plan for the unplanned
- Holdbacks (amounts kept from closing disbursements for a period of time)
- Ensure proper due diligence is performed (special attention to aging AR and AP)
- Deep evaluation of employee related issues (potential future litigation)
- Have a well documented process and threshold for accessing holdback funds
- Identify any errors in the reps and warranties – purposeful or otherwise
- Have a clear understanding of the communication requirements (within X days via Y method)
- These unplanned liabilities are common
- Have a plan to mediate the exposure
- Be diligent in your discovery, reps and warranties
- Be ready with a plan, including a holdback
Revenue Rocket can help with undisclosed liabilities before, during, and after a transaction. Connect with us to set up a no-obligation introductory call with our team: email@example.com