liabilities like warranty claims (stock purchase)

searcher profile

April 18, 2021

by a searcher from Claremont McKenna College in San Francisco Bay Area, CA, USA

working on the potential acquisition of a leading RV dealership with almost $2 M EBITDA (have a growth plan, with my background in rental software)

doing it as a stock purchase (not asset purchase) in order to preserve the licenses, contracts and the floor plan line. but, that means managing the liabilities:

besides indemnification, how could one limit the exposure to liabilities like warranty claims? take historical warranty claim costs and set up a seller-funded account (escrow?) to manage any future overage?

thanks for any thoughts! best, Andy

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commentor profile
Reply by a professional
from Fordham University in Houston, TX, USA
Might be easier to discuss. I think a seller would reject such a proposal and it’s not typical. But read another way - it almost sounds like working capital adjustment. If there are customary levels of warranty claims, are they (or could they be) reflected in adjusted financial statements on which the purchase price is based?

Indemnification is basically the way but you can increase the utility/value of indemnification with holdbacks and earnouts etc. Also warranty claims could be a specific indemnity with its own nonexistent/reduced basket and/or nonexistent/increased cap.

Also of course: due diligence.
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Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA
We just recently did something very similar -- there is a baseline of normal warranty work built into the financials, and thus already reflected in the valuation. The buyer's concern is if there is something extraordinary -- we set up an escrow holdback for warranty expense that exceeded the normal 12 month warranty period. For product liability, a different animal, in a stock sale your insurance should stay intact and be a primary source for covered items. If you are ending a claims-made policy, you should explore tail insurance.
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