Explore a recent M&A case in Indiana where a post-closing audit played a pivotal role in price adjustment. Learn how post-closing audits and purchase price adjustments can be essential in M&A deals with uncertain asset quantities.
M&A Stories
February 22, 2019
In a recent M&A case, a seller in Indiana faced a legal challenge after selling its assets, primarily asset cylinders, to a buyer in 2014 for $1.6 million. The sale price hinged on the number of cylinders involved, with the seller representing roughly 6,500 cylinders. However, due to the uncertainty of an exact count (many were in use), the agreement included a post-closing audit to adjust the purchase price.
The audit’s results were critical. If it found more than 6,500 cylinders, the purchase price would increase at $125 per cylinder; if fewer, it would decrease at the same rate. To safeguard the buyer against an inventory shortfall (between 5,300 and 6,500 cylinders), $150,000 of the purchase price was withheld. The audit, delayed but extended with the seller’s agreement, revealed fewer cylinders—about 4,700.
As a result, the buyer retained the $150,000 holdback and claimed an additional $75,000 in damages for the cylinder shortfall. This led to a legal battle in an Indiana federal district court, with the trial court ruling in favor of the buyer.
In summary, this case highlights the importance of post-closing audits in M&A deals, especially when critical assets’ quantities are uncertain. Additionally, withholding a portion of the purchase price can help mitigate risks associated with optimistic inventory representations.
Case Reference:
Arc Welding Supply Co., Inc. v. American Welding & Gas, Inc., No. 18-1546, United States Court of Appeals, Seventh Circuit., (Decided February 14, 2019).
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