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M&A Closings: Valuation Sheets

After the deal is negotiated and the purchase agreement is signed, the closing period begins. During this phase, a Buyer must confirm that it will actually receive what it bargained for, and will not get loaded down with unwanted or unforeseen problems. One integral component of the closing period is the valuation schedule, which is prepared by the Buyer and either attached to the purchase agreement or submitted after the agreement is signed. The valuation schedule serves an allocation function, apportioning the properties and assets of the target company.

The valuation schedule is primarily used for title defects purposes, to establish values and to discourage use of preferential rights. There is a fine balance that must be struck between the Buyer’s and Seller’s needs though; if the Buyer inflates values to preclude exercise of preferential rights, there is an increased risk that those values will reappear in title defect notices. But if the Buyer depreciates the value of a property in order to use only part of its true value for assets or preferential right properties, it may wish to change course if the chosen property has the highest number of serious title defects.

The waters become more murky yet when there are no preferential rights at stake, causing the Buyer and Seller to engage in a guessing game to determine which properties are most likely to suffer defects. The back and forth negotiation can often drag on for very long periods of time—in part because the two sides lack a standardized valuation methodology. The effects are sometimes magnified by a relative lack of experience on the part of either the buyer or seller.

When such situations arise, it is advisable to seek help from an M&A attorney. An experienced attorney can help get the deal back on track by socializing the Buyer and Seller with each other’s concerns, and advocating for implementation of a standard valuation methodology to help bridge the divide.

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