Purchase price adjustments reflect changes in the target entity`s agreed purchase price, which typically occur between the signing of the Memorandum of Understanding or the acquisition agreement and the closing date. These price adjustments are made after closing, when the financial statements are finally prepared. From the initial fixing of the purchase price until or after closing, there can be delays for many reasons, such as. B Hart-Scott Rodino`s filing, other administrative authorizations, third party consents, buyer`s ongoing diligence, tax matters, litigation and changes in business situation. Adding an NWC sample as a schedule to the sales contract can also be very helpful in minimizing litigation. Another important, sometimes controversial, issue is the definition of the items included and excluded in the adjustment, as well as the accounting policies and procedures to be applied for the calculation of these items. This is a critical step. Inattention to these details and mistakes can lead to costly post-conclusion litigation and significant economic losses. It is essential that the parties` lawyers, management, accountants and financial advisors work closely together as a team to design and negotiate these provisions, paying particular attention to things that could be manipulated, misinterpreted or challenged a posteriori. Once the parties to the transaction have agreed on a purchase price (often subject to the satisfactory conclusion of due diligence or other terms of the buyer), lawyers are often asked to recall three aspects regarding the purchase price: (1) the special financial ratio to be used for purchase price adjustment purposes; (2) the reference amount of that ratio, against which the corresponding final amount is to be measured; and (3) the specific procedures by which adaptation is to be defined (before and/or after completion). (d) Another problem that arises is that the initial capital prepared by the seller is not IN ACCORDANCE WITH GAAP.
The main purpose of NWC`s adjustment is to protect the buyer from fluctuations in working capital between the date of agreement of a purchase price for the target transaction and the conclusion. The buyer usually wants to be sure to receive a minimum of agreed working capital in exchange for the purchase price, in order to avoid having to increase their investment to meet working capital needs after closing. In the case of mergers and acquisitions (“M&A”), the final sale agreement (whether an asset sale agreement, a share sale agreement or a merger agreement) generally contains provisions for post-closing purchase price adjustments. [ii] Most often and overall, these adjustments are intended to reconcile changes in certain aspects of the target entity`s financial position at the time of closing the transaction (generally compared to an earlier date or to “representative” or average historical financial ratios).