Purchase Price Disputes: How Business Valuation Can Help Resolve Them

This article will help you learn the causes of purchase price disputes and the role of a business valuation expert in resolving purchase price disputes.

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Target firms with non-publicly traded common stock are more likely to encounter arbitration concerns in M&A transactions related to purchase price adjustments (PPAs) as well as indemnification claims. Disputes arising from failed mergers and acquisitions are certain to rise as the number of these transactions rises. Purchasers and sellers spend a considerable amount of time disputing over the conditions that control modifications to the purchase price while drafting acquisition agreements.

While dispute resolution procedures and the specifics of each case have led to varying outcomes, fundamental reasons have remained quite consistent. This article will help you learn the causes of purchase price disputes and the role of a business valuation expert in resolving purchase price disputes.

Purchase Price Dispute And Business Valuation

When a contract is finalized, the parties involved may finally relax after months or even years of arduous bargaining. Disputes over post-acquisition modifications to the purchase price are a common source of stress for all parties involved, and they may be quite expensive.

In order to preserve value, it is essential that disagreements be resolved quickly and effectively, before they develop into full-blown litigation.

What Are Purchase Price Disputes?

When a buyer and a seller cannot come to terms with the purchase price of a company or asset, a purchase price dispute ensues. These disagreements arise when parties’ valuations of a transaction diverge for reasons including financial analysis, market circumstances, or contractual interpretation.

The best way to settle a disagreement about the purchase price is by negotiation, mediation, or litigation. To arrive at a fair and mutually accepted buying price, it is necessary to analyze financial data, take into account expert viewpoints, and use valuation procedures. The success of the transaction and the continued peace and goodwill of the parties concerned depend on the amicable settlement of any disagreements over the purchase price.

Importance Of Business Valuation In Resolving Purchase Price Disputes

By giving a neutral and unbiased estimate of a company’s value, business valuation is a crucial tool in settling disagreements over the acquisition price. When parties to a potential acquisition have divergent viewpoints on a fair price, a valuation study may be used to settle the matter by determining what the business is worth in light of its historical performance, current market circumstances, and other considerations.

During negotiations, the valuation assessment may serve as a reliable reference point that moves things along toward a satisfactory conclusion. With the help of a third-party expert’s appraisal, the buyer and seller may have a better grasp on the company’s true worth, reduce tensions, and settle on a price that works for everyone.

Causes of Purchase Price Disputes

Common causes of disputes include disagreements over valuation techniques, financial data, and contract language. It takes research, negotiation, and a deep grasp of the problems at hand to reach a satisfactory resolution to such conflicts.

Differences in valuation methods – Divergent viewpoints on the value of the firm might arise when buyers and sellers use different valuation processes or depend on different assumptions. Disputes over the final sales price may be rooted in parties’ differing opinions on the appropriate valuation approach or their interpretation of the findings.
Disagreements over financial information – Disputes may also arise from disagreements over financial information, such as when two parties provide conflicting financial facts or disagree on how to interpret financial statistics. While vendors may provide upbeat forecasts, purchasers may take a more sobering approach. There may be further difficulty in settling on a purchase price if there are disagreements over the veracity, completeness, or usefulness of the financial data being used.
Misunderstandings of contract terms – If the terms of the purchase deal aren’t clear or aren’t understood, this can lead to a lawsuit. The ultimate purchase price might be contested if the parties had conflicting interpretations of the earn-out, contingent payment, adjustment, or working capital needs clauses.
Changes in market conditions – Movements in the industrial landscape, the economy, and general market trends are all examples of external influences that might affect how much people value a particular business. Disputes may arise when buyers and sellers have conflicting opinions about how much a shift in the market should affect the asking price.

Business Valuation Techniques for Resolving Purchase Price Disputes

There are many different approaches to business valuation, and they may be used in the process of settling purchase price disputes in order to get to an agreement that is fair and reasonable. Among the most typical approaches are:

Market-Based Valuation

The method relies on current market conditions and past deals of similar companies to arrive at an estimate of the latter’s worth. To establish a baseline for the contested purchase price, it is customary to look at the prices at which enterprises like the one at issue have been purchased and sold in the past.

Comparable company analysis – In this approach, comparable publicly listed firms are sought out and analyzed for their similarities to the company at issue. The market multiples of similar firms may be used to determine the worth of the company in question by comparing important financial measures such as the price-to-earnings (P/E) ratio or the enterprise value-to-sales (EV/Sales) ratio.
Precedent transaction analysis – This method entails looking at previous deals in the same sector with businesses with comparable characteristics. The worth of the firm in question may be estimated by comparing the acquisition prices and key financial data from previous deals to the company in question. Considerations like firm size, growth potential, and transaction specifics are included in the research to arrive at a reasonable acquisition price.

Income-Based Valuation

Methods that are based on the firm’s predicted future profits or cash flows are used to analyze and assess the worth of the company. The following are two strategies that are often employed within this approach:

Discounted Cash Flow (DCF) method – The discounted cash flow (DCF) approach calculates the worth of the contentious firm by discounting its projected future cash flows to the present using a chosen discount rate. The future profits potential of the firm may be accurately estimated using this method, which factors in the current value of money.
Capitalization of Earnings (CapE) method – The CapE approach uses the firm’s projected future profits and a suitable capitalization rate to establish a valuation for the company at issue. Investors need a certain rate of return to justify the degree of risk they’re taking on with the firm, and that return is reflected in the capitalization rate. A valuation estimate is calculated by taking the anticipated earnings and dividing it by the capitalization rate.

Asset-Based Valuation

This method examines the net assets of the firm in addition to their worth in the current market. The following are two strategies that are often employed within this approach:

Adjusted Net Asset Method (ANAM) – When determining a company’s worth, the ANAM looks at its net assets. These include property, equipment, inventories, patents, trademarks, and goodwill. The liabilities are removed from the recorded value of the asset to arrive at its true market value. The company’s estimated worth is the after-adjustment net asset value.
Liquidation valuation – This method involves making an estimate of the worth of the contentious firm by imagining a liquidation of its assets. The value is calculated by taking into account the expenses of selling the assets and paying off the obligations. When an organization is no longer viable as a going concern, a liquidation value is performed.

Role of Business Valuation Expert in Resolving Purchase Price Disputes

When it comes to settling disagreements about the acquisition price of a firm, the skills, and information that a business valuation specialist brings to the table is very essential. The following are some of the most important functions that a business valuation specialist plays.

Conducting A Thorough Analysis Of Financial Data – A qualified valuation specialist performs a thorough analysis of the contested company’s financial statements, previous performance, and any other data that may be pertinent. In order to calculate the enterprise’s true worth, they examine the available financial data through several distinct valuation approaches. Their objective evaluation offers an impartial appraisal that assists stakeholders in gaining a greater knowledge of the organization’s value.
Providing Expert Testimony and Opinion – An expert in business valuation may offer expert testimony and provide their professional judgment on the worth of the firm in the event of contentious situations. They might be asked to defend their results by explaining the methodology, assumptions, and findings that underpinned their valuations in a way that is both comprehensible and convincing. Their knowledge gives credibility to the evaluation process and assists stakeholders in making choices that are based on accurate information.
Assisting In Negotiations and Settlements – For the benefit of all parties involved, a qualified evaluator may function as an impartial third party throughout talks and finalizations. They bring their expertise as well as their knowledge of the process of valuation to the table, which assists the parties in understanding the reasoning behind the assessment and facilitates fruitful negotiations. The expert may help enable a settlement that is satisfactory to all parties concerned by offering an evaluation that is both fair and objective. This allows the expert to help close the gap across the parties who are in dispute.

Legal Considerations in Resolving Purchase Price Disputes

There are several legal factors to consider when trying to settle a disagreement over the purchase price. To successfully negotiate the legal factors involved in settling purchase price disputes, it is recommended that you seek the advice of legal specialists with expertise in commercial transactions and dispute resolution.

A few important legal considerations are as follows.

Contractual provisions for purchase price disputes

Any possible issues with the purchase price must be addressed in the purchase agreement in clear and specific language. These clauses may explain the applicable legislation and jurisdiction, as well as dispute resolution processes such as negotiation, mediation, and arbitration.

Having clearly specified terms and conditions in regard to valuation methodology, modifications, and dispute resolution processes may assist in reducing conflicts and give a foundation for addressing problems.

Role of Courts and Arbitration in resolving disputes

Cases involving disagreements about the purchase price may end up in court or an arbitration hearing. The interpretation of contractual clauses, the evaluation of evidence, and the making of a judgment are all very important jobs that fall within the purview of courts and arbitration tribunals.

Whether a disagreement is resolved in court or via arbitration is determined by the parties’ choices, the conditions of the contract of purchase, and the law of the forum in which the issue originates. Knowing the possible expenses, time commitments, and other factors connected with each choice is crucial.

Importance of complying with legal and regulatory requirements

Purchase price disputes must be resolved in accordance with applicable laws and regulations. All rules and regulations must be followed, including those pertaining to financial reporting and taxation. Methods used in valuation exercises should adhere to well-accepted norms and guidelines.

The result of a dispute resolution proceeding may be affected by a party’s failure to comply with applicable laws and regulations.

Get A Business Valuation From Experts!

It is crucial to seek business valuation specialists’ advice when settling purchase price disputes. It is possible to undertake a thorough appraisal of the company in dispute with the help of these specialists since they have the requisite information, competence, and analytical abilities.

Eqvista is a reliable resource that provides expert company assessment services. Our professional valuation experts ensure that all values are fair and consistent with market norms. Need a high-quality valuation report for business? Contact us now!

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