Vendor relationships often change or end after a merger or acquisition. Existing agreements, when informal or improperly documented, can lead to third-party claims impacting both buyer and seller. In a recent SRS case, an acquired company in the U.S. had been purchasing products at a fixed price per unit from multiple vendors overseas. The parties had an informal understanding that if the vendors’ costs exceeded a certain threshold, then the company would compensate the vendors accordingly. However, the agreements and formula for calculating the additional costs were not clearly documented or formally executed by the parties.

After the acquisition, the buyer terminated these relationships. The vendors submitted invoices for reimbursement based on their interpretations of the informal agreements, and as part of the working capital adjustment, the buyer then submitted a claim well over $1M against escrow stemming from these invoices.

A forensic accounting team from SRS spent ten days analyzing the vendors’ claims, gathering more information from the acquired company’s CFO and CEO, and comparing the new claims to past practices. Their conclusion: the vendors’ claims were overstated. Because the arrangements had been in place for months prior to the acquisition, the team could document the actual terms of the arrangements, identify miscalculations made by the vendors, and convince the buyer that the results of this analysis refuted the vendors’ claims. Ultimately, this enabled the buyer to contest the vendors’ claims and reduce the payout from escrow by $1M.

There are several lessons to be learned in order to avoid unexpected and inflated claims from vendors that are subject to post-closing indemnification by the selling shareholders. First, do a contract review to ensure that all obligations are well documented and understood by both the vendor and the company. Many issues we’ve seen have arisen from informal or verbal contractual relationships or contracts that have not been fully executed.

Second, discuss with buyer’s acquisition team their plans for vendor relationships post-closing and build a vendor transition plan, if necessary. Many issues can be avoided with effective communication between the buyer, company and vendors. Surprise terminations can lead to inflated final invoices, especially when the company is purchased by a large, well-established acquirer.

Finally, make sure that the post-closing acquisition team is provided with a list of each vendor’s primary sales representative, other important contacts at the vendor and, if appropriate, do transition calls or meetings. Transitioning the personal relationships can go a long way towards avoiding post-closing claims from vendor bills.

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