Does a lost customer just before deal closing always mean “damages?”

BVWireIssue #86-4
November 18, 2009

What’s the impact on the purchase price—or more broadly—on overall value, when a target company loses a significant customer just before the deal closes?

“It depends on the characteristic of the customer,” according to Jeff Litvak and William Kennedy in their presentation, “Pitfalls to Avoid When Assessing Damages in M&A Disputes" at the AICPA BV Conference in California. Was the loss due to “normal” customer attrition or not?

Jeff and Bill laid out a five-point plan to help determine the severity of the customer loss:

1. Calculate the value of the customer to the business (i.e., contribution margin, operating profit, or customer EBITDA).
2. Ascertain subject company's (in this case, the target company’s) customer turnover rate.
3. Ask: Can the customer can be replaced? Will it be replaced?
4. Assess the impact of the loss on long-term capital structure.
5. Distinguish between an impact on only a few earnings periods versus an impact that extends into perpetuity.

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