Crain’s Cleveland | Purchase price adjustments in M&A: Avoiding costly mistakes

Read the full article in Crain’s Cleveland Business

by Dustin Vrabel and Casey Davis

The number of M&A transactions, specifically in Northeast Ohio, have been steadily increasing the past few years. Most of these private M&A transactions will include a post-closing purchase price adjustment provision. If not effectively structured and negotiated, these post-closing purchase price adjustment provisions can be an easy way to lose significant value in a deal. While purchase price adjustments are intended to preserve value and equitably allocate risks to the buyer and seller, these provisions are complex and involve a mix of legal and accounting concepts and standards. In order to protect your interest from unintended consequences, it is essential that deal team members – lawyers, accountants, and the business team – ensure the language and calculation methods for the post-closing adjustment provisions and related procedures are clear.

Depending on the form of the transaction and the nature of the business, post-closing purchase price adjustments may be based on a variety of financial measures, including working capital, net assets, book value, net debt, and shareholders’ equity.

The most common purchase price adjustment mechanism is a working capital adjustment, which is an adjustment based on the difference between the target’s actual net working capital at closing compared with an agreed target net working capital amount expected at closing. For example, if the target net working capital is $2 million, but actual working capital at closing is $1.8 million, the seller would pay or credit the buyer an additional $200,000 in adjusted purchase price.