How best to navigate expert determinations

When navigating mergers or acquisitions, even carefully drafted agreements can produce unexpected disputes. Buyers and sellers can find themselves at odds over completion account adjustments, earn-out calculations, warranty and indemnity claims, contingent valuations, or intangible asset assessments. These complexities can stall progress, create uncertainty, and erode trust. In a straitened economic environment, such disputes are if anything more likely to occur as parties become even more focused on obtaining the best value possible from the deal. 

By understanding why such issues arise, parties can better prepare for and manage these challenges. In this article, we explore practical strategies to streamline and get the most from the “expert determination” process embedded into many sale agreements.   

If you find yourself in this position and want to talk to a forensic expert immediately, contact one of our team members below. 

What is an Expert Determination? 

An “Expert determination” by an independent accountant to resolve otherwise intractable differences over draft Completion Accounts or Earnout Accounts is a common feature of many Sale & Purchase Agreements (“SPAs”).  The procedure is, though, called upon relatively rarely: perhaps 5%-10% of all deals.  When faced with the necessity of this “determination” process, how do you give yourself the best chances of success?

Consider the risk factors  

It is tempting, when negotiating and completing a deal, to consider it ‘job done’ – at least in terms of price - when the sale contract is signed.  The ‘adjustment mechanism’ to the deal price that is built into any Completion or Earnout Accounts process, however, has the ability to swing those numbers in dramatic fashion.   An early, considered appraisal of the risk for post-deal dispute can identify factors likely to cause friction over the accounts, and give you time and opportunity to prepare for the dispute to come.    

Common warning flags include: 

• Vague or ambiguous language used to specify the accounting policies to be followed (perhaps due to hard-fought discussions); 
• Significant differences between the parties in how they normally account for key balances; 
• Significant balances that rely upon judgement or estimation;    
• The financial consequence to individuals involved in the deal of the final numbers (e.g. bonus dependent upon final number, earnout payout); 
• Emotional or personal investment in the process by one or other party; 
• A lack of understanding, on either side, as to the accounting policies and treatments actually applied in the ‘reference’ accounts being used as a consistency benchmark.

Lay the groundwork early 

If you think there is a reasonable chance of disagreement in the post-deal phase, it usually pays to invest some time in preparation.  Time and again we see parties coming into a formal dispute where it is apparent that one or other has not adequately prepared to give itself the best chances of success.    

Some key early steps to take, which are likely to pay off in the post-deal negotiations and perhaps avoid any need to go to an independent expert at all, are: 

• Understand the SPA and what it really says, rather than what you would like it to say or what you intended it should say. An independent expert will look at the face meaning of the words used and, if they are clear, apply them.  ‘Intention’ generally is of much less weight. 
• Identify, extract and collate relevant supporting evidence for your arguments from the accounting records, emails, meeting minutes etc. Not only will this help to support your case in the negotiations, it will be a key requirement in due course from the expert.  
• When assembling your arguments, ensure they are consistent. It is surprising to us how often a party argues for a particular clause to be interpreted one way in respect of one disputed item, only to present a contradictory argument in respect of a different disputed item. There is no harm at all in preparing alternative arguments but do acknowledge that they may be either/or positions.

You may also consider engaging a forensic accountant who is experienced in the world of determinations. An experienced advisor can help you in an objective reading of the SPA, advise on arguments and evidence likely to persuade an accountant, objectively consider the strengths and weaknesses of your position and – if appropriate – tell you when you are probably wasting your time and money in pursuing the dispute.

Engage with the process 

If it looks likely that the disagreement is heading to formal determination, the parties will need to agree on the identity of the independent expert.  Someone who works regularly in this (somewhat niche) area will apply a more robust and reliable analysis to the issues.  If you have a forensic accountant already in your corner they may well be able to advise on expert candidates.   

The expert will likely require formal written submissions from each party, accompanied by relevant documentary evidence.  As in the preparatory stage, an experienced forensic accountant can be a valuable resource in focusing and shaping the written submissions. Key points to bear in mind include: 

• Remember that the expert is an accountant, not a judge (a lawyer). Address the issues that are important to an accountant, in accounting language. Points of law may be relevant, and they can be addressed in legal terms, but in general try and avoid writing in legalese. 
• Root your arguments in the terms of the SPA. It is the guiding document to the expert. 
• As in the preparatory stage, ensure your arguments are consistent and coherent. Make clear where, if applicable, you have primary and alternate arguments. 
• Be measured in tone and language. A determination is, with very rare exceptions, a 100% paper exercise. Flourishes of language that may play well in a courtroom are less likely to succeed on paper and may obscure the accounting point that you are trying to make. 
• Guide the expert through the evidence you provide. For example, if you provide a bulky spreadsheet do point the expert at the relevant part(s) and explain the calculation workings.

In brief, the more helpful you are to the expert in setting out your arguments and evidence, the better your chances of getting your point across.

BDO's experience  

BDO has four senior individuals who take determination appointments in their own name (or act as client advisors) who have, collectively, over 100 years of experience in expert determinations, either as expert or client advisor. If you would like to know more, please contact us.