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M&A Hot Topic: Avoiding Pitfalls in Working Capital Adjustments and Earnout Provisions


Speaker(s): Charles K. Blank, Erik C. Lioy, Zachary S. Snickles
Recorded on: Oct. 20, 2016
PLI Program #: 197329

Erik Lioy is the national managing partner of Grant Thornton LLP’s Forensic  Advisory Services practice. Prior to his national leadership role, Erik held local and regional leadership roles within Grant Thornton.

Experience

Erik has extensive experience advising buyers and sellers in post acquisition disputes regarding the calculation of working capital, net equity, earn- outs and other contingent consideration calculations. In addition, he has served as a court appointed expert and arbitrator in a post acquisition dispute matters.

Erik’s case work also includes providing financial due diligence and structuring advice to strategic and financial buyers. He has experience negotiating acquisitions, preparing closing balance sheets and integrating target companies.

Erik has provided expert testimony and issued expert reports on damages and various accounting, business and financial matters including post acquisition disputes. Prior to joining Grant Thornton, Erik practiced with a forensic accounting and consulting firm. He has also held senior financial appointments with companies where he was responsible for financial reporting, analysis and acquisitions.

Practice areas

  • Forensic and investigative services
    • Internal investigations
    • Board investigations
    • Asset tracing
    • Government/regulatory matters
    • Fraud prevention and detection
  • Litigation and dispute services
    • Arbitrator/neutral assignments
    • Contract disputes
    • Damages analysis
    • Expert testimony
    • Lease disputes
    • Partnership disputes
    • Purchase price disputes

Education and professional credentials

University of Pittsburgh, MBA Duquesne University, BSBA
Certified Public Accountant, NC License 30969 Certified Fraud Examiner (CFE)
Certified in Financial Forensics (CFF)
Certified Construction Auditor (CCA)
Certified Global Management Accountant (CGMA)

Representative post-acquisition dispute assignments

  • Served as a court appointed expert in a post-acquisition dispute between a publically held company and the selling shareholders of a software and consulting company. Work performed included interviewing current and former employees of the target company, investigation of travel records and evaluation of revenue recognition for software sales and services. Rendered expert report and provided deposition testimony regarding the proper calculation of three year earn-out provision in a purchase agreement.
  • Served as a neutral arbitrator in connection with a closing working capital dispute between the buyer and seller of a software company. Disputed items included reserve for bad debt, contingent liabilities and revenue recognition.
  • Served as a neutral arbitrator in a post-acquisition dispute between a public software company and a private equity group. The dispute involved the determination of a closing working capital purchase price adjustment. Disputed items involved revenue recognition, valuation of accounts receivable, accrual of payroll cost and accrual of other operating expenses. A binding reasoned award was issued.
  • Served as neutral arbitrator in a post-acquisition dispute between a manufacturing company and individual selling shareholders. The dispute over the final purchase price adjustment involved several items in the closing balance sheet including valuation of accounts receivable, inventory and construction-in-process. A binding reasoned award was issued.
  • Served as neutral arbitrator in post-acquisition dispute related to the acquisition of a contract research organization. Dispute included revenue recognition issues for multiple contracts. A binding reasoned award was issued.
  • Served as neutral arbitrator in connection with a dispute regarding the closing balance sheet and related purchase price adjustment from the sale of a post-secondary professional training academy. Issues arbitrated included accounts receivable valuation, revenue recognition and various accrued operating expenses. A binding reasoned award was issued.
  • Served as neutral arbitrator in connection with post-acquisition closing working capital dispute for a technology company. Issued bidding reasoned award.
  • Provided expert reports and testimony at arbitration in connection with the acquisition of a hospital. Arbitrator ruled favorably in 4 of 5 disputed items (valuation of receivables, accrual of Disproportionate Share Hospital (“DSH”) receivable, and other working capital items) and awarded our client prevailing party.
  • Provided expert report and testimony at arbitration on behalf of client in connection with the acquisition of a manufacturing facility. Dispute involved valuation of inventory including cost accounting issues and reserves for damaged, obsolete and excessive inventory. Matter settled favorably following testimony.
  • Served as consulting expert in multiple post-acquisition disputes regarding determination of working capital purchase price adjustments and claims under rep and warranty clauses of purchase agreements.
  • Assisted arbitrators in conducting accounting research, analyzing claims and drafting reports in numerous post-acquisition disputes.


Experience

Mr. Snickles has spent his entire career in professional services and has expertise in both litigation support and forensic accounting matters. He also has extensive experience assisting clients in post-acquisition purchase price disputes in both a consulting capacity and neutral capacity. Prior to Grant Thornton LLP, he worked in the Core Assurance Services practice followed by the Fraud Investigation and Dispute Services practice of Ernst & Young LLP.

Litigation support and forensic accounting engagements

  • Litigation consulting and strategy
  • Economic damages calculations
  • Expert report preparation
  • Expert testimony preparation
  • Fraud investigations
  • Forensic interviews
  • Electronic document reviews
  • Forensic data analytics
  • Regulatory consulting and monitoring
  • Alternative dispute resolution
  • Malpractice defense
  • Post-acquisition purchase price disputes

Post-acquisition purchase price dispute experience

  • Global service companies – Retained as arbitrators for binding arbitration to prepare final determinations of working capital and purchase price. Issues involved:
    • International Financial Reporting Standards (IFRS);
    • determination of Earnings Before Interest and Taxes (EBIT);
    • shareholders’ equity accounts; and
    • calculation of final payment. 
  • Medical device manufacturer – Retained as arbitrators for binding arbitration to prepare final determinations of working capital amounts. Issues included:
    • appropriate recognition of assets and liabilities;
    • inventory valuation;
    • accounting for deposits received;
    • GAAP consistently applied vs. contractual language; and
    • apportionment of arbitrator fees.
  • Retail building suppliers – Retained as arbitrators for binding arbitration between two retail building suppliers, one in bankruptcy. Multi-million dollar disputed items included:
    • determination of inventory lower of cost or market (LCM); and
    • GAAP consistently applied.
  • Medical equipment manufacturer – Retained in a consulting role for a multi-million dollar post-acquisition earn-out payment dispute between a Fortune 500 Company and private enterprise in the medical equipment business. Issues related to:
    • interference;
    • revenue recognition;
    • expense allocations; and
    • determination of the earn-out amount under a purchase agreement.
  • Food manufacturer – Retained in a consulting role for an international public company to assist in crafting multiple submissions in a multi-million dollar working capital dispute involving the purchase of another entity. Issues related to:
    • accounts receivable reserves;
    • inventory valuation; and
    • accrued liabilities.
  • Airline industry – Retained in a consulting role for the seller of a regional airline carrier regarding a claim against them for allegedly breaching the representation and warranty passage of the purchase agreement related to interim financial statements being prepared in accordance with GAAP. Issue included:
    • inventory valuation;
    • asset impairment; and
    • materiality of alleged misstatements.
  • Cosmetic industry – Retained in a consulting role for the seller of a cosmetics brand to assist in crafting multiple submissions in a multi-million dollar working capital dispute. Issues involved:
    • inventory valuation; and
    • accrued expenses.

Separate of his litigation support, forensic accounting and post-acquisition purchase price dispute experience, Mr. Snickles has performed financial statement, SOX compliance, federal funding compliance and IT attestations for multiple clients in a wide variety of industries. Additionally he has performed transaction advisory services, business consulting services as well as restructuring and turnaround services for many different clients. 

Licenses, certifications and professional affiliations

  • Certified Public Accountant (Arizona, Illinois)
  • Certified in Financial Forensics (CFF)
  • Certified Information Technology Professional (CITP)
  • American Institute of Certified Public Accountants
  • Association of Certified Fraud Examiners
  • Arizona Society of Certified Public Accountants

Education

  • Master of Science in Accountancy (Cum Laude) – University of Notre Dame
  • Bachelor of Science in Management Information Systems and Entrepreneurship (Magna Cum Laude) – University of Arizona

Presentations & publications

  • “Contractual Accounting Language: Trouble Spots and How to Avoid Them (2016)
  • “Exposing Fraudsters Using Profiling and Forensic Data Analysis” (2016)
  • “New Era of Data Analytics” (2016)
  • “Forensic Interviewing” (2016)
  • “Bribery and Corruption Risks” (2013)
  • “Enron…10 years later” (2011)


Charles advises clients on disputes and investigations involving complex accounting matters under US GAAP and IFRS. In addition, as a leader of Grant Thornton’s Accounting Change Implementation Group, Charles assists clients with implementing new accounting standards and technical consultations.

Charles has extensive experience as both a neutral arbitrator and consultant in post-acquisition disputes related to working capital adjustments and earn-out provisions of purchase agreements.

Post-Acquisition Dispute Experience Representative examples of Charles’ experience include:

  • Retained as arbitrators in a post-acquisition dispute involving the sale of a leading provider of environmental services. Disputed items related to whether amounts included in closing net working capital were prepared in accordance with GAAP and consistently applied with seller’s past accounting practices. The disputed items pertained specifically to various accruals involving estimates including those for litigation and environmental violations, state sales and use tax audits, and uncertain tax positions. The agreed upon protocol included submission of position statements by the disputing parties, follow-up questions and document requests by the arbitrator, and a determination letter with the arbitrator’s binding decision and rationale.
  • Retained as arbitrators in a post-acquisition dispute involving the sale of a hospital from a private equity firm to a healthcare operator. Disputed items related to whether amounts included in closing working capital were prepared in accordance with GAAP, consistently applied with seller’s past accounting practices, with respect to bad debt allowances for multiple classes of patient receivables, reserves for Medicare audit adjustments, and the methodology for computing incurred but not reported claims arising from self-insured health coverage. The agreed upon protocol included submission of position statements by the disputing parties, follow-up questions and document requests by arbitrator, conference calls with the disputing parties and outside consultants, and a determination letter with the arbitrator’s binding decision and rationale.
  • Retained as arbitrators in a post-acquisition dispute involving the sale of a defense contractor from a sole shareholder to a purchaser in the aerospace industry. The dispute focused on the earn-out provisions in the purchase agreement and in particular whether the contract provided for the purchaser to apply purchase accounting in the determination of the earn-out amount. The agreed upon protocol included submission of position statements by the disputing parties, follow-up questions and document requests by arbitrator, and a determination letter with the arbitrator’s binding decision and rationale.
  • Retained as arbitrators in a post-acquisition dispute involving the sale of a logistics services business. Disputed items related to whether amounts included in the closing net cash payment and net working capital amounts were prepared in accordance with GAAP, consistently applied with seller’s past accounting practices, with respect to foreign currency translation, classification of cash subject to foreign exchange controls, bad debt allowances for receivables, treatment of certain lease deposits, and settlements of billing disputes. The agreed upon protocol included submission of position statements by the disputing parties, follow-up questions and document requests by arbitrator, and a determination letter with the arbitrator’s binding decision and rationale.
  • Retained as arbitrators in a post-acquisition dispute involving the sale of a health maintenance organization. Disputed items related to the applicable methodology for computing incurred but not reported claims and whether to tax effect adjustments to the balance sheet of a component entity included in the sale. Services included a determination letter with the arbitrator’s binding decision and rationale.
  • Retained as experts by counsel for the seller of an insurance claims management company in a post-acquisition dispute. Disputed items related to whether certain deferred revenue balances should be included in closing working capital. Services included an affirmative expert report and rebuttal commentary on the purchaser’s analysis and opinion.
  • Retained by counsel for a joint venture of two private equity firms in assessing their claims as well as the claims against them in a post- acquisition dispute over the closing working capital resulting from the sale of an aerospace business. Our scope of services included conducting a mock arbitration, providing feedback to counsel on the joint venture positions and assistance in the preparation of the brief and reply brief filed in the arbitration.
  • Engaged as the accounting referee in a post- acquisition earn-out dispute involving interpretation and application of accounting terminology to a formula approach payout of additional earn-out consideration related to the sale of a live on-line chat service provider. Services included defining the process, conducting proceedings with counsel and their clients and providing a live presentation of the opinions and the decision criteria for several contested items.
  • Retained as experts for the acquirer of a consumer goods manufacturer in a dispute over the treatment of capitalized overhead. Issues addressed related to the types of costs to be included in inventory, the primary working capital item. Our scope of services included an affirmative expert report as well as rebuttal commentary on the opposing side's expert's analysis and opinion.
  • Retained as arbitrators in a post-acquisition dispute involving the sale of radio station assets in various U.S. markets. The disputed item related to whether certain unearned revenue should be included or excluded from the calculation of working capital as defined in the asset purchase agreement. Services included a determination letter with the arbitrator’s binding decision and rationale.
  • Retained as accountants in a dispute between an investment manager and an investor in hedge funds managed by the investment manager. The item in dispute related to the calculation of amounts under a revenue share agreement between the parties. Services included a report of the procedures performed and our findings as it relates to calculation of revenue during the relevant periods.

Professional qualifications and memberships

  • Certified Public Accountant (New York)
  • Chartered Financial Analyst
  • American Institute of Certified Public Accountants
  • New York State Society of Certified Public Accountants

Education

  • Northwestern University, Bachelor of Arts – Economics