Purchase Price Adjustments in Private M&A Transactions

by Practical Law Corporate & Securities

This Practice Note explores the intricacies of purchase price adjustments within private M&A transactions, offering a detailed examination of their structuring and the common issues that arise. Purchase price adjustments serve as a protective measure for buyers against value fluctuations of the target company between valuation and transaction closing. Key considerations include the basis and mechanics of the adjustment, dispute resolution procedures, and the overlap with indemnification provisions. The Note highlights the importance of setting accurate working capital targets and the role of financial metrics such as net worth, EBITDA, and specific liabilities in determining adjustments. It addresses the timing of adjustments, whether at closing or post-closing, and discusses the implications of accounting principles and the potential for disputes. The Note also examines the role of independent accountants in resolving disputes and the allocation of their fees. Additionally, it considers the use of escrow accounts to secure post-closing obligations. This comprehensive guide is essential for parties involved in M&A transactions to navigate the complexities of purchase price adjustments effectively.