M&A Monday - The Importance of a Litigator in M&A and Common Issues Post-Closing

This post is co-posted with Travis Ritter, our new Chair of Litigation. You can reach him at Travis@Albrecht.Law.

We do M&A deals and tax structuring, so why did we add a Litigation Group led by Travis Ritter, an experienced commercial litigator?

The ugly truth is many M&A deals have post-closing disputes - some small and some signifigant. This is even more prevalent in small deals and we have seen them a fair amount. Getting a litigator involved early helps to avoid significant and more costly issues in the future.

Here are some of the issues in our deals -

1. Breach of Covenants. In a deal we did last year, after closing, a seller started soliciting customers, competing, and disparaging the business – all restricted by the provisions of the purchase agreement. We immediately brought in a litigator and demanded recourse. In addition to the seller ceasing, we also reduced the promissory note by the amount of losses the seller caused due to our offset provisions.

2. Misrepresentations. This may be the most common post-closing issue. In the purchase agreement seller makes promises about what is true about the business (What and Who Stands Behind the Reps). In a deal we closed, the seller represented that employee’s salaries were $X and no employee had been promised a raise. We found out post-closing that the most key employee had been promised a raise. We have uncovered tons of misrepresentations after closing, including misstating inventory, AR, litigation, and even their ownership of equity (there was a co-founder).

3. Fraud. In more rare circumstances, the seller fraudulently misstates something. On one deal, the seller was paying employees cash under the table and paying for the employee’s home leases. This reduced expenses and boosted EBITDA by almost $1m. We brought in a litigator and multiplied $1m by the going-in multiple to equal a $5m loss (not including attorney’s fees and other damages). Once the seller received the lawyer letter, they conceded quickly.

4. Earnout and contingent payments. As a partner at my prior firm said, an earnout is a litigator’s best friend. Contingent payments (earnout, forgivable note) are almost always disputed. We represented a seller who was denied their earnout. We litigated on behalf of the seller to recover what was due to him.

5. Employment Issues. There are tons of employment issues after purchasing a business. Recently, a buyer took over and the employee immediately threatened a discrimination lawsuit.

These issues can get very complex. Combining the power of a litigator and the knowledge of a skilled M&A and tax team is the best combination for post-closing disputes.

If you raise these issues to a litigator early, the cost is often lower and can result in real money being recovered. Often some guidance and strategy brainstorming helps to guide a dispute to a successful resolution.

If you have any questions regarding M&A or other commercial litigation, you can contact Travis Ritter, Chair of Litigation at Travis@Albrecht.Law.