Mergers & acquisitions: Protect yourself from take backs
A. Generally, indemnification clauses are designed to protect the buyer from a take back or recoupment based upon claims filed before the buyer purchased the company. I strongly recommend that every buyer consider including an indemnification clause in the agreement. But, in today's environment of ZPIC audits and 100% prepayment reviews, the indemnification clause alone may not be enough. Every buyer should review and verify all pre-sale claim compliance filed by the seller. Previous claims can have a direct impact on a buyer's on-going cash flow.
Many prepayment reviews result from the ZPIC auditor first completing a post-payment analysis of previously submitted and paid claims. These are likely claims filed by the seller long before you purchased the company. Now, because of the policies and procedures of the previous owner, your cash flow has slowed significantly. In a ZPIC prepayment review, even a good claim can take up to four months from the date it is filed until you receive payment.
The buyer did not provide and bill past claims, but it will suffer slow cash flow. And be warned, most indemnification clauses do not protect against this type of cash flow problem. It is important to realize that even with the most compliant internal systems, a new buyer could easily face six or more months of slow to non-existent cash flow.
Stephanie Morgan Greene is general counsel for Harrington Management Group, also known as The Audit Team. Reach her at email@example.com or 888-833-3478.