Earn out Hierarchy Schedule Overriding Parent Accounting Guidelines
An explicit contractual hierarchy schedule overriding parent corporate accounting guidelines protects post-closing earn-out payouts from corporate overhead allocations.
Seller Review Rights
Meaning
Contractual provisions in a purchase agreement allow the outgoing owner to inspect and challenge the financial calculations used to determine the final sale price. Seller review rights are activated after the closing of a deal, particularly when the price is subject to a post closing adjustment or an earn out. The seller is given access to the books, records and working papers of the target company for a specified period to verify the accuracy of the buyer’s figures.
If the seller disagrees with the buyer’s calculations, they can submit a notice of objection, which triggers a negotiation or an expert determination process. These rights stop applying once the final accounts have been agreed upon and the period for filing a challenge has expired. Most acquisition agreements define the scope of the seller review rights to prevent the seller from interfering with the ongoing operations of the business.
The purpose of these rights is to ensure that the seller receives the full value they are entitled to under the contract.
Access to Information
Providing the necessary data to the seller is a mandatory requirement for the buyer during the post closing phase. Seller review rights typically include the ability to interview the company’s accountants and to visit the corporate offices to inspect physical records. The buyer must cooperate in good faith and provide all the information that the seller reasonably requests to conduct their review.
This transparency is essential because the buyer now has full control over the company’s financial systems and could potentially manipulate the data to their advantage. The seller often hires their own accounting firm to conduct a thorough analysis of the closing balance sheet. This independent review helps to identify any deviations from the agreed accounting policies.
The cost of this review is usually borne by the seller, although some agreements allow for a sharing of the fees if significant errors are found.
Objection Procedure
Formal steps for challenging the financial results must be followed strictly to preserve the seller’s claim for an adjustment. Seller review rights require the seller to provide a detailed list of the items they dispute, along with the reasons for their objection and the proposed alternative value. This notice of objection must be filed within a short window, often thirty to sixty days after receiving the buyer’s report.
If the seller fails to object within this timeframe, the buyer’s figures become final and binding. This deadline puts pressure on the seller to work quickly and to focus on the most material issues. The parties then enter a period of negotiation to try and resolve the differences without further legal action.
If a settlement cannot be reached, the dispute is referred to an independent accounting expert for a final decision. This systematic approach ensures that the financial adjustments are handled in a professional and timely manner.
Post Closing Adjustment
Successful exercise of the review powers can result in a significant change in the total cash consideration paid for the company. Seller review rights are the primary defense against a buyer who tries to reduce the purchase price through aggressive accounting or the reclassification of assets. If the seller proves that the working capital was higher than reported, the buyer must pay the difference to the seller.
Conversely, the review might show that the seller owes money to the buyer. This final settlement is an important part of the closing process, ensuring that neither party is unfairly disadvantaged by the timing of the deal. The agreement often specifies that any payments made as a result of the review are treated as an adjustment to the original purchase price for tax purposes.
This characterization simplifies the tax reporting for both the buyer and the seller. The availability of seller review rights provides the confidence needed for parties to sign a deal with a floating price mechanism.