Litvak, Kennedy, and Mathieu have JofA article this month on valuing post-acquisition damages


Congrats to Jeff Litvak, Ken Mathieu, and Bill Kennedy on their article in this month's Journal of Accountancy.  They look at the types of issues that arise from claims that sellers failed to disclose material issues prior to a transaction.

Typical of their analysis, they ask: what if a significant customer was lost just before the transaction, and this was not disclosed to the acquirer? Jeff, Ken and Bill agree that because the customer’s contribution to the profits of the business would impact future earnings and, therefore, current value, nondisclosure of the customer loss represents a potential claim by the buyer. "To get to the core of the issue, the appraiser needs to ask if the customer will be replaced and if its departure was part of ordinary customer turnover; or if the customer is a key source of value to the business. The buyer may make a “benefit-of-the-bargain claim” arguing it did not receive the value that was represented to it by the seller based on the failure to disclose the loss of the customer," the authors state.

...The value of the customer to the business should be evaluated along with the target’s customer turnover rates. If the loss and replacement of customers is common for the company, there may not be any damages. A financial analysis of the customer’s contribution to the company could result in three potential scenarios: (1) the customer was not profitable to the company; (2) the customer was profitable to the company and was expected to have a finite life with the company; or (3) the customer was profitable, and the expectation was that the customer would be retained for years into the future. If an investigation revealed that scenario 1 was the case, there may be no damages. If scenario 2 was deemed to have occurred, it could possibly result in damages calculated based on the contribution over the life of the customer contract or some other indication of the time period the company would have realized the benefits of the customer. If the facts and assumptions support scenario 3, it could result in a revaluation of the company by excluding the cash flows related to this customer from the target’s forecast or pro forma trailing 12 months EBITDA.

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