Establishing Precedence Clauses in Cross-Border Earn out Agreements
Explicit precedence clauses in cross-border earn-out agreements prevent accounting schedules from overriding core legal risk allocations and governing law provisions.
Post Closing Audit Dispute
Meaning
Financial disagreements arising after the completion of a transaction occur when the buyer and seller contest the final purchase price adjustment based on audited accounts. A post closing audit dispute typically centers on differing interpretations of accounting standards applied to the closing balance sheet. The process is initiated when the buyer delivers its draft closing accounts and the seller objects to specific line items.
This procedure terminates when a final adjustment is agreed or decided by an independent accountant.
Accounting Divergence
Disagreements often arise from the choice of accounting principles used to value inventory, accounts receivable, or deferred revenues. The seller typically prefers principles that maximize the purchase price, while the buyer seeks to minimize the closing valuation. When a post closing audit dispute occurs, the parties examine whether the closing accounts were prepared using the same methods as the historical financial statements.
This consistency is essential for a fair comparison. It prevents the buyer from using more conservative policies to reduce the final price. The disputes frequently involve complex write-downs of bad debts or provisions for obsolete inventory, where judgment plays a major role in the valuation.
By analyzing these adjustments in detail, the parties can identify where the accounting methods deviated from the contractually agreed standards.
Resolution Procedure
Contracts usually contain a structured timeline for resolving these financial discrepancies before they escalate into formal litigation. The objecting party must deliver a detailed dispute notice specifying the items and amounts in question. After delivery, the parties enter a negotiation phase to resolve the contested points.
If they fail to agree within the specified period, the remaining disputed items are referred to an independent accounting firm. This referral is designed to be a quick and cost-effective alternative to court proceedings.
Financial Settlement
The final determination of the independent accountant results in a cash adjustment paid from one party to the other. To avoid excessive disputes, some contracts include a threshold where adjustments are only made if the total difference exceeds a specific percentage of the purchase price. Once the expert issues the determination, the payment must be made within a set number of business days.
This payment settles the transaction accounts permanently, leaving no further room for adjustment.