A seller called me in February about a working capital neutral accountant determination that had been bleeding for four months. Closing had been the prior June. The buyer had delivered a proposed final closing statement in September that came in $1.8 million below the seller’s estimate, and the seller had filed objections within the thirty-day window. The dispute had now landed on the desk of one of the Big Four firms, retained as the “Independent Accountant” under the standard form M&A working capital tie-breaker clause.
The seller’s CFO was furious. The company had used the same revenue-recognition convention on long-tail service contracts for a decade. The convention had been in every set of audited financials handed over in diligence. The buyer’s accounting team had touched those statements in QofE and not flagged it. And now the buyer was arguing that the convention was not GAAP-compliant, that the proper application of GAAP produced a deferred revenue balance $1.8 million higher than the seller’s number, and that the Independent Accountant was bound to apply GAAP.
I told the CFO what I tell every seller in that posture. The seller almost always loses these disputes — not because the seller is wrong on the accounting, but because the contract has already decided the question by the time the Independent Accountant opens the file.
The dispute resolution clause is doing two jobs at once
Almost every middle-market purchase agreement has a working capital adjustment driven by a closing statement that the buyer delivers within sixty to ninety days post-close. The seller has a window — usually thirty days — to object. If the parties cannot resolve the objections, the matter goes to a pre-named accounting firm acting as “expert and not arbitrator,” and the firm’s determination is binding except for manifest mathematical error. How the working capital target number is set and trued up at closing is the upstream piece of that mechanic — what most practitioners do not see is that the same clause is also picking the substantive standard the working capital neutral accountant will apply.
What practitioners think of as the dispute resolution clause is actually doing two jobs. First, it picks the decision-maker and the procedure. Second — and this is the job nobody pays attention to at the table — it picks the substantive standard the decision-maker will apply. The standard is almost always some version of “the agreed accounting principles” plus a fallback to “GAAP, consistently applied with the most recent audited financial statements of the company.” That fallback is where the seller’s case usually dies.
An Independent Accountant looking at a seller’s argument that runs against GAAP — even an argument grounded in a long-running, audited company practice — has a reflex to apply GAAP and call it a day. The accountant’s professional standards push them toward GAAP. Their internal risk-management group is reading over their shoulder. Their malpractice carrier is reading over the risk-management group’s shoulder. The path of least resistance for the accountant is to apply GAAP and let the seller take the loss, because nobody at the accounting firm gets fired for applying GAAP.
The result is that “Specified Accounting Principles” or “Agreed Accounting Policies” or whatever the parties have called the exhibit — the exhibit that is supposed to lock down the company’s actual historical practices and outrank the GAAP fallback — almost always loses to GAAP when the dispute is close.
The doctrinal answer is in Chicago Bridge
The leading Delaware authority on what an Independent Accountant can and cannot do is Chicago Bridge & Iron Co. N.V. v. Westinghouse Electric Co. LLC, decided by the Delaware Supreme Court in June 2017. Vice Chancellor Laster had sent the dispute to the Independent Auditor below; the Supreme Court reversed, holding that the auditor’s mandate under that purchase agreement was narrower than the trial court had read it. The reasoning is the part that matters for drafting. The Court emphasized that an expert-not-arbitrator clause in a purchase agreement defers to the Independent Accountant only on disputes that are within the contractually defined scope of the Accountant’s authority — and that scope is set by the words the parties wrote, not by the general subject of “working capital.” If the parties have not given the Accountant authority to decide a question, the Accountant cannot decide it — and a court will not enforce a determination outside that scope.
The doctrinal lesson is that the scope of the Accountant’s mandate is itself a drafting question. If the agreement directs the Accountant to apply “the Specified Accounting Principles set forth on Exhibit X and, only where Exhibit X is silent, GAAP” — and the Accountant applies GAAP to override Exhibit X — that determination is challengeable in court as exceeding scope. If instead the agreement directs the Accountant to apply “GAAP, consistently applied with the company’s most recent audited financial statements” — with the Specified Accounting Principles relegated to interpretive guidance — the Accountant’s GAAP determination is almost certainly binding.
That is a one-word change in the dispute resolution clause and a complete inversion of the seller’s leverage. Most sellers do not catch it because the negotiation has already been pulled into the dollar target — the negotiated working capital peg — and not the document architecture that controls what the Accountant is allowed to do with the peg.
What the Specified Accounting Principles exhibit should actually do
The Specified Accounting Principles exhibit, treated correctly, is one of the highest-leverage documents in a sell-side practice. It is also routinely treated as a checklist that the seller’s CFO assembles in the last week before signing. That asymmetry is where buyers win and sellers do not know they are losing. It belongs to the same family of definitions-that-decide-the-deal as the cash-free, debt-free traps that catch founders at closing — the working capital neutral accountant rarely sees the line item the seller assumed was settled.
Three drafting moves matter. First, the exhibit should enumerate, by line item, the historical accounting practices the company has used — not at a level of abstraction (“revenue recognized on a percentage-of-completion basis”) but at a level of specificity that decides the disputes (“revenue on Type A service contracts is recognized ratably over the contract term, with the unearned portion booked to deferred revenue at month-end at the rate computed pursuant to the methodology described in Schedule A-1”). The specificity is the entire point. An Independent Accountant given a vague principle and a specific GAAP rule will apply the GAAP rule.
Second, the exhibit needs to expressly outrank GAAP, with the rank order written into the body of the agreement and not just in the exhibit. The right formulation is something like: “Closing Working Capital shall be calculated in accordance with the Specified Accounting Principles set forth on Exhibit X. To the extent the Specified Accounting Principles do not address a particular item, GAAP, consistently applied with the Company’s most recent audited financial statements, shall apply. In the event of any conflict between the Specified Accounting Principles and GAAP, the Specified Accounting Principles shall control.” The third sentence is the one most agreements omit and the one that decides the disputes.
Third, the dispute resolution clause itself should narrow the Independent Accountant’s mandate to the specific items in dispute, with express direction that the Accountant may not impose accounting principles other than those set forth in the agreement. That phrasing — borrowed from the deal forms that the more experienced sell-side firms use — is what gives a seller a credible scope-of-authority challenge if the Accountant goes off-script. Without it, the seller is stuck with a GAAP determination it cannot appeal.
The 2026 vintage of the working capital tie-breaker
The reps and warranties insurance market has changed the dynamics of working capital disputes in a way that practitioners are still absorbing. With RWI now standard on most middle-market deals, the indemnification escrow has shrunk or disappeared, and the working capital escrow has stayed. That has pushed more of the post-closing economic dispute into the true-up, which is to say, into the working capital neutral accountant’s lap. A seller who has given up the indemnification fight at signing and assumed the working capital adjustment would be a clean-up exercise is finding that the working capital adjustment is now where the deal is actually being re-priced.
The recent SRS Acquiom working capital studies confirm what most practitioners are seeing — purchase price adjustments are now present on well over ninety percent of private-target deals, the median separate PPA escrow has crept up to roughly one percent of transaction value, and roughly a quarter of buyer PPA claims exceed that one-percent threshold. The fees the Independent Accountant charges on a contested matter routinely run into the high six figures, and those fees are typically split — which means the seller is funding the accounting firm that is about to rule against the seller.
None of those trends change the drafting answer. They sharpen it. The asymmetry between buyer-friendly and seller-friendly working capital drafting sits almost entirely in the Specified Accounting Principles exhibit and the express ranking clause. A seller who has not negotiated those will lose the working capital dispute even if it has the better accounting argument.
What I tell sellers at the term sheet
The conversation I now have with founders well before signing is a short one. The working capital peg is the headline number, and the term sheet is where everyone fights about the peg. The drafting that decides whether the peg holds — the Specified Accounting Principles exhibit, the rank order between the exhibit and GAAP, the scope of the Independent Accountant’s mandate — does not show up in the term sheet at all. It shows up in the purchase agreement after the negotiating heat has moved elsewhere, and it is treated as plumbing.
If you are running an M&A process for a company with any accounting practices that diverge from textbook GAAP — which describes almost every middle-market operating company — the Specified Accounting Principles exhibit is the document that protects the deal economics. Not the peg. Not the dispute resolution clause. The exhibit, with line-item specificity, with express rank over GAAP, and with a dispute resolution scope that the working capital neutral accountant cannot exceed.
The published opinion in Chicago Bridge & Iron Co. N.V. v. Westinghouse Electric Co. LLC remains the doctrinal backbone for the scope-of-authority question and is the right citation for any motion seeking to vacate or modify an Independent Accountant’s determination.
If you are negotiating a working capital provision on a pending sell-side deal — or are post-close and now staring at an Independent Accountant determination that is not going your way — feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
