Post-acquisition disputes are a recurring feature of private equity transactions, even in well-run deals. While purchase price adjustments (PPAs) and representation and warranty insurance (RWI) are designed to address different risks, they often intersect in practice – particularly where accounting judgments drive both valuation and liability outcomes.

Understanding how these mechanisms interact is increasingly important, as the same underlying financial issue can play out through two very different post-closing processes: a contractual price true-up or an insured claim.

The life cycle of a PPA dispute 

PPAs tend to follow a relatively structured but contentious path:

1.     Closing assumptions set at signing

The PPA process begins during deal negotiation, when the parties establish target working capital, net debt, cash, and other adjustment metrics based on historical financial information and the agreed framework set forth in the purchase agreement (Agreement). Although these provisions are often heavily negotiated, many accounting definitions still leave room for interpretation when applied post-close. As a result, issues that appear settled at signing can quickly become contested once the buyer takes control of the business.

2.     Preparation of closing accounts

After closing, the buyer prepares the closing accounts and calculates any proposed purchase price adjustment under the Agreement’s methodology. This is often the first point at which the parties apply the Agreement’s accounting concepts to the actual financial condition of the business at closing. Sellers frequently scrutinize whether the buyer’s calculations are consistent with the accounting principles, methodologies, and historical practices contemplated by the Agreement.

3.     Dispute over accounting treatment

Most PPA disputes arise from accounting characterization disagreements rather than purely mathematical errors. Common areas of contention include accrual policies, reserve adequacy, deferred revenue treatment, inventory valuation, customer credits, contingent liabilities, and the classification of debt-like items. Timing differences also frequently create disputes, particularly where revenues or expenses fall close to the closing date. Sellers may argue that the buyer is applying new accounting approaches post-close or interpreting Agreement definitions in a manner that artificially reduces working capital or increases net debt.

4.     Expert determination or arbitration

Once objections are raised, the parties typically enter a negotiation process involving deal counsel, accounting advisors, and management personnel. Many disputes are resolved through commercial compromise, but matters that the parties cannot resolve are often referred to an independent accounting expert under the Agreement’s dispute resolution procedures. The expert’s role is generally limited to resolving technical accounting and calculation issues within the framework of the Agreement, rather than making broader legal determinations.

5.     Cash true-up

The process concludes with a final determination of the adjustment amount and a corresponding payment between buyer and seller, either increasing or reducing the effective purchase price. Although these disputes can become highly contentious, PPAs are fundamentally intended to operate as contractual valuation true-ups rather than fault-based claims.

The life cycle of an RWI claim

RWI claims also follow a relatively structured path:

1.     Discovery of breaches

Post-closing, the buyer/insured may discover issues or losses that give rise to RWI claims. These issues are wide-ranging (such as material contracts, condition of equipment, audit findings, employee issues, and undisclosed litigation) and include both first-party losses and third-party claims. They may overlap with or be discovered during the PPA.

Once an issue is discovered, it is best practice to have coverage counsel consider the following: Is there a breach? Did a loss result from the breach? Was the issue disclosed? Do any exclusions apply?

2.     Claim submission

RWI claims are initiated by a formal written notice to the insurer that includes facts regarding the breach, the representations that have been breached, and the resulting loss. It is best practice for coverage counsel to draft the claim notice (subject to client review), as it will include a detailed legal and factual analysis of each claim. Counsel or a broker may submit notice, but it often must be signed by an authorized officer of the insured. The insured has the right to update the initial notice.

3.     Investigation period

After receiving notice, the insurer has a period, often 30 to 60 days, to provide a coverage analysis or request additional information regarding the factual basis of the claim. Insurers will typically exercise their right to investigate claims. Their investigation can include requests for documents and other information, as well as employee interviews. During this period, the parties exchange correspondence (usually written by counsel) regarding each party’s position on the relevant information and analysis of the claim’s merits. This process tends to be slow-moving and can sometimes take a year or more, depending on the scope of the factual investigation and the timing of the parties’ responses. During the investigation process, the insured may refine and enhance its claim or drop portions that turn out to be unsupported. 

4.     Dispute resolution

If parties cannot resolve a dispute, they turn to the RWI policy’s dispute resolution provision. The buyer has input into the provision during the underwriting process, and may provide for mediation, arbitration, and/or litigation.

Why this matters for PE deals

PPAs and RWI are often discussed as separate deal protections, but in practice, they frequently converge. A single issue identified post-close can affect purchase price, trigger a dispute over financial reporting methodology, and form the basis of an insurance claim. Examples of such claims include a demand for payment by an undisclosed broker, the discovery of improperly recognized revenue that inflated working capital, or an unrecorded liability that alters the valuation of acquired assets, such as an undisclosed warranty obligation associated with defective products. As a result, the interaction between these mechanisms has become an increasingly important aspect of post-acquisition risk allocation in private equity transactions.

As such issues are identified, the buyer should consider whether they are best covered by PPA, RWI, or a combination of both. Buyers should be mindful of RWI mitigation requirements and what must be addressed during a PPA to satisfy such requirements. Additionally, although RWI allows recovery arising from matters that are also subject to the PPA process, it does not allow double recovery of amounts collected.

Accordingly, buyers and their advisors increasingly approach PPAs and RWI not as isolated deal protections, but as interconnected components of overall transaction risk allocation.