Suppose that late in diligence a buyer concludes that $1.2 million of a seller’s receivables will not be collected. Two customers have paid slowly for a year, and the seller has never reserved against them. The buyer’s view is that the business is worth less than its books show. The seller’s is that the buyer set its price from those books and could have bid less. Both may be right, and a working capital true-up can settle the disagreement in opposite directions depending on where the reserve is entered.
The agreement sets an $8.0 million working capital target from the seller’s reference balance sheet and moves the price dollar for dollar with the difference at closing. The seller’s closing statement shows $8.3 million, so the seller collects $300,000. Assume the two customers owe the same $1.2 million on both dates. If the buyer’s reserve enters the closing statement but not the target, closing working capital is $7.1 million against $8.0 million, and the seller pays $900,000 instead of collecting $300,000. The whole reserve has become a price change, although nothing in the business moved between the two dates. If the reserve enters both, the target falls to $6.8 million, closing working capital is $7.1 million, and the seller again collects $300,000. Had the two balances grown to $1.5 million by closing, the both-sides version would charge the seller for the $300,000 increase, which is the kind of change a true-up is meant to measure.
I read the one-sided version as a price cut, and it can be a fair one. If the headline assumed those receivables would be paid, the buyer has a case for paying less. I would want that case made where the seller can answer it: in the headline, in a target recomputed with the reserve, or in a specific indemnity for the two accounts. A closing review is a poor forum for it, as one agreement’s review process shows.
The Delaware Supreme Court’s 2017 decision in Chicago Bridge & Iron v. Westinghouse describes that process and the wording that kept an accounting dispute out of it. That agreement sent closing-statement disputes to an independent auditor acting as an expert rather than an arbitrator, with 30 days to decide on the parties’ written submissions alone. Westinghouse used that process to claim nearly $2 billion and acknowledged that most of the claims rested on the theory that the seller’s historical financial statements misapplied GAAP. The court held that those claims could not go to the auditor. It relied on the working capital definition, which required GAAP as the seller had consistently applied it in the business’s financial statements, and on Westinghouse’s agreement that its only remedy for inaccurate representations was to refuse to close. Arguments about changes between signing and closing stayed with the auditor.
The holding is tied to that contract. The court decided it on the pleadings, about an agreement it described as unusual, with a closing price of zero and no post-closing liability for the seller’s representations, and later proceedings in the case are not covered here. The opinion also rejected Westinghouse’s comparison to a 2015 Court of Chancery decision, Alliant, whose definition required GAAP and, separately, consistency with the seller’s practices, which the Chancellor there read as two tests. Alliant appears here only as the Supreme Court described it. My reading of the contrast: a consistency definition keeps the reserve in my example out of the closing statement unless the parties write it into both sides, while a definition with a freestanding GAAP test gives the buyer an argument for adding it to the closing statement alone.
The buyer’s objection is fair as far as it goes. A consistency rule pays the seller for its own accounting, counting receivables it never reserved at face value. That argument belongs before signing, while the headline is open and the seller can answer with its collection history. A buyer that signs a consistency definition should not expect the closing review to correct the historical books, and a seller that accepts a freestanding GAAP test while a known dispute is open has, on my reading, let the closing review reach part of the price.
If neither side will move, the gap is $1.2 million of price. Writing it into the accounting principles only decides where the argument goes after closing: out of the true-up under a consistency definition, or into a review like the one in the Westinghouse agreement, with 30 days and written submissions to decide it.