Designing Account Concentration Offsets In M and A Earnout Provisions
Earnout provisions neutralize customer concentration risk by capping single-account profit contributions and establishing baseline revenue substitution thresholds.
accounting arbitration
Meaning
Dispute resolution mechanisms in acquisition agreements often designate an independent financial expert to resolve disagreements over post-closing financial adjustments. Through accounting arbitration, buyers and sellers avoid court litigation by presenting contested balance sheet items to a neutral professional.
Expert Selection
Parties designate a qualified accounting professional with no prior relationship to either the buyer or the seller to ensure impartiality. The selected practitioner evaluates specific disputed line items according to the standards outlined in the contract. This assignment consumes considerable administrative hours from the founder, who must supply supporting documentation for the contested numbers.
Resolution Procedure
Formal submissions are made by both sides to present their calculations and arguments. The arbitrator limits the review to the specific items submitted, preventing a broader audit of the entire financial statement. Under this mechanism, the decision remains binding and generally cannot be appealed except in cases of fraud.
It holds the founder to the outcome without further recourse.
Financial Outcome
Adjustments to the final purchase price are executed based on the binding decision. Correcting the disputed figures affects the cash distributed to shareholders and alters the post-closing obligations. The procedure establishes the finality of the transaction balance sheet and brings the transaction to a close.