Explore the legal implications of unemployment insurance on M&A transactions. Learn from a recent case involving a buyer and seller’s dispute over elevated insurance costs.
M&A Stories
October 23, 2023
Introduction:
In the world of Mergers and Acquisitions, understanding the implications of unemployment insurance ratings can be crucial. This factor can significantly affect the sale of a business. Let’s delve into a recent case that highlights this issue.
Background:
In this case, the seller was a business involved in computer system sales, service, and hardware, with two store locations in Connecticut. The buyer, formed in 2007, specialized in supporting information technology systems for law firms and Connecticut businesses.
In 2015, as the seller’s owner was planning for retirement, an asset purchase agreement was initiated. The buyer acquired the seller’s client list, goodwill, and physical store locations. The agreement stipulated that for five years, ending in November 2020, the buyer would make monthly payments to the seller’s owner, calculated at 65% of the monthly account profits from the seller’s former clients.
However, the seller’s business didn’t perform as expected. Furthermore, the state imposed the seller’s high unemployment insurance rating on the buyer, leading to increased insurance costs.
Legal Proceedings:
This situation led to a legal dispute in a Connecticut state court. The trial court ruled that the buyer couldn’t seek damages from the seller for its elevated unemployment insurance costs. The buyer appealed this decision.
Outcome:
The appellate court also did not hold the seller responsible for the buyer’s increased unemployment insurance expenses.
Conclusion:
This case illustrates the potential impact of a seller’s unemployment insurance rating on an M&A deal. Buyers should be vigilant about such factors when projecting a target’s post-closing performance, especially when determining the acquisition price based on earnings multiples.
Case Reference:
CCI Computerworks, LLC v. Evernet Consulting, LLC, No. AC 44975 Appellate Court of Connecticut (Argued February 2, 2023. Officially Released September 5, 2023).
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
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Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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