A business sale is a multi-stage process involving forensic scrutiny of financials, tax structuring, and negotiation of value. Even seasoned owners with long-standing accountants can encounter disputes that threaten the transaction. These disputes often arise from technical missteps—incorrect EBITDA adjustments, failure to reconcile working capital, or inconsistent treatment of exceptional items. This article examines the granular realities of sale preparation, valuation disputes, and how to mitigate risks through rigorous accounting practice.

2. The Accountant’s Role in Sale Preparation and Valuation

Accountants should begin with a pre-sale audit, ensuring all ledgers reconcile and that management accounts align with statutory accounts. This includes:

• Reviewing accruals and prepayments for completeness.

• Ensuring all contingent liabilities (e.g., warranties, litigation, deferred tax) are disclosed.

• Normalising earnings by adjusting for non-recurring items (e.g., one-off grants, insurance recoveries).

• Preparing a detailed working capital analysis, including seasonality and cash flow trends.

A robust sale pack should include:

• Three years’ audited financial statements.

• Management accounts to the most recent month.

• A schedule of adjustments (e.g., add-backs for owner remuneration, non-business expenses).

• A tax position summary, including deferred tax assets/liabilities and any HMRC correspondence.

Example: An accountant omits a deferred tax liability from the balance sheet, inflating net asset value. During buyer due diligence, this is flagged, resulting in a downward price adjustment and loss of credibility.

3. Common Valuation Disputes and Technical Triggers

Valuation disputes often centre on methodology:

• EBITDA multiples: Disagreement over what constitutes “adjusted EBITDA,” especially regarding add-backs for exceptional costs, owner benefits, or related-party transactions.

• Net asset value (NAV): Disputes over asset impairment, inventory valuation (FIFO vs. weighted average), and provision adequacy.

• Discounted cash flow (DCF): Conflicting assumptions about growth rates, terminal value, and risk premium.

Accountants should:

• Document all adjustments with supporting schedules.

• Provide a reconciliation between statutory and management accounts.

• Disclose all related-party transactions and ensure arm’s length pricing.

Example: The seller’s accountant uses aggressive add-backs for “one-off” legal fees, while the buyer’s accountant argues these are recurring. The lack of a clear schedule and supporting documentation leads to a £150,000 valuation gap.

4. Sale Preparation: Technical Pitfalls and Best Practice

Key pitfalls include:

• Incomplete fixed asset registers (missing depreciation schedules, unrecorded disposals).

• Unreconciled intercompany balances.

• Failure to accrue for outstanding supplier invoices or holiday pay.

• Inconsistent VAT treatment on cross-border transactions.

Best practice steps for accountants:

• Conduct a pre-sale forensic review, including supplier and customer confirmations.

• Prepare a “due diligence Q&A” document anticipating buyer queries (e.g., revenue recognition policy, bad debt provision methodology).

• Ensure all tax filings (VAT, PAYE, corporation tax) are up to date and reconciled to the accounts.

Example: The buyer’s team requests a breakdown of revenue by customer and product line. The accountant cannot provide this due to incomplete records, resulting in a delay and renegotiation of terms.

5. Negotiating and Resolving Accountant Disputes

When disputes arise:

• Insist on a joint reconciliation meeting, where both parties’ accountants walk through the trial balance, adjustment schedules, and working capital calculations.

• Use a “locked box” mechanism to fix the balance sheet at a specific date, reducing post-completion disputes.

• Appoint an independent valuer (often a chartered accountant with transaction experience) to arbitrate technical disagreements.

Accountants should:

• Prepare a “sources and uses” schedule showing how sale proceeds will be allocated.

• Document all assumptions and methodologies in a technical memo.

• Ensure engagement letters include dispute resolution clauses (e.g., referral to ICAEW arbitration).

Example: Both sides agree to a locked box date, but the buyer’s accountant challenges the treatment of accrued income. The independent valuer reviews the supporting contracts and rules in favour of the seller, preserving the agreed price.

6. Mediation and Alternative Dispute Resolution

When technical disputes persist, mediation or expert determination can be invaluable.

• Mediation involves appointing a neutral facilitator, often with a background in corporate finance or accountancy, to guide both parties through contentious adjustments and valuation methodologies.

• Expert determination is more technical: both sides agree to be bound by the decision of an independent accountant or valuer, who reviews the disputed schedules, contracts, and working papers.

Accountants should:

• Prepare a comprehensive “dispute file” including all correspondence, adjustment schedules, and supporting documentation.

• Summarise key points of contention (e.g., treatment of deferred revenue, impairment of receivables) in a briefing note for the mediator or expert.

• Attend mediation sessions with a clear reconciliation of disputed figures and alternative scenarios.

Example: A dispute over the treatment of stock obsolescence is referred to expert determination. The independent accountant reviews historical write-offs, stock ageing reports, and industry benchmarks before issuing a binding decision.

7. Legal Action: When Disputes Escalate

If mediation fails, legal recourse may be necessary.

• Claims may be brought for professional negligence (failure to meet the standard of a reasonably competent accountant), breach of contract (failure to deliver agreed sale preparation services), or misrepresentation (providing inaccurate financial information).

• Evidence required includes signed engagement letters, technical memos, adjustment schedules, and all email correspondence relating to disputed items.

Accountants should:

• Ensure all advice and calculations are documented contemporaneously.

• Retain copies of all working papers, including draft accounts, adjustment schedules, and correspondence with both client and buyer.

• Cooperate with legal counsel in preparing witness statements and technical reports.

Example: A seller claims for lost sale proceeds after a buyer withdraws due to undisclosed liabilities. The court reviews the accountant’s working papers and finds that key liabilities were omitted, resulting in a finding of negligence and an award of damages.

8. Protecting Your Exit Strategy: Proactive Steps

To minimise risk and ensure a smooth sale:

• Schedule annual “exit readiness” reviews with your accountant, focusing on reconciliation of all ledgers, tax compliance, and documentation of exceptional items.

• Use engagement letters that specify the scope of sale preparation, dispute resolution mechanisms, and indemnity provisions for negligent advice.

• Request a “vendor due diligence” report before going to market, identifying potential red flags and areas for improvement.

Accountants should:

• Maintain a rolling file of all sale-related documentation, including board minutes, tax computations, and adjustment schedules.

• Advise on structuring the sale to optimise tax efficiency (e.g., asset sale vs. share sale, use of entrepreneurs’ relief).

• Prepare a post-completion checklist covering final reconciliations, tax filings, and handover of records to the buyer.

Example: Prior to sale, the accountant prepares a vendor due diligence report highlighting a historic VAT underpayment. The issue is resolved before negotiations begin, preventing disruption and protecting sale value.

9. Conclusion

Business sales are complex, and technical disputes with accountants can have material financial consequences. By insisting on rigorous documentation, transparent methodologies, and clear engagement terms, business owners can safeguard their exit strategy. Accountants play a pivotal role—when they follow best practice, anticipate buyer queries, and document every adjustment, they help ensure a successful, dispute-free transaction.

Disclaimer:
This material is for general information only and does not constitute medical, financial, tax, or legal advice. For guidance on your specific situation, consult a qualified professional.