Legal Commentary

Valuation, M&A and Escrows

By davidwanetick

I learned an interesting point at the Due Diligence Symposium organized by America's Corporate Growth yesterday. It is far better that aggressive reporting of revenues on the part of the company being acquired be discovered by the acquirer before the acquisition takes place. This is true even though there are usually escrows created to compensate the acquiring company in such events. The reason is that--if the aggressive revenue recognition is detected before the purchase takes place--the acquirer will save a multiple of the purchase price. If the aggressive revenue recognition is discovered after the acquisition closes, the acquirer will only receive a dollar for dollar credit.

There was also some talk of specific contingency insurance. While difficult to obtain in today's credit-restricted markets, this insurance can be purchased with the filing of a claim (nearly retroactively). There are some accounting benefits to this such as obtaining an immediate expense instead of a capitalized cost.

Full post as published by Vertical Pulse on May 07, 2009 (boomark / email).