The NWC`s calculation should exclude assets and liabilities that are not transferred as part of the sale or that have no economic value after the closing of the financial statements (p.B. certain tax positions). It is preferable to agree on a detailed schedule of accounting methods and procedures for items that are particularly contrary to opinion, such as. B, inventories, reserves for uncollected accounts, reserves for contingent liabilities, provisions for paid leave and bonuses, pro-rated expenses and other problematic items that are specific to the target company`s industry. Parties should avoid language that simply states that items must be determined ”in accordance with GAAP” (generally accepted accounting principles), as GAAP often permits the use of a range of accounting policies. It is important that the seller ensure that the adjustment elements are calculated in accordance with the seller`s prior accounting practices for these items. The seller wants an ”apples with apples” comparison of the final NOC and does not want the buyer to get a more favourable adjustment by changing the accounting rules. (g) It is necessary to consider what happens if the party responsible for preparing the calculation of the final purchase price does not do so or is not appropriate in the preparation of that calculation. Should this party lose its right to request an accommodation? Should the other party then be able to prepare the calculation? If the other party is the seller and the seller decides to prepare the calculation, the seller must have access to the target company`s financial records, which are under the buyer`s control. Payment of the amount of the adjustment shall be due as soon as the amount of the adjustment has been agreed or finally determined by the accounting arbitrator.

For some transactions, part of the purchase price is deposited to guarantee payment of an adjustment due by the seller. Sometimes the agreement also provides for interest to be charged on unpaid adjustment amounts in order to avoid late payments. Purchase price adjustments reflect changes in the target company`s agreed purchase price, which typically occur between the signing of the letter of intent or acquisition agreement and the closing date. These price adjustments will be made after completion, when the key date figures will finally be determined. There may be delays between the initial determination of the purchase price and completion or after for many reasons, such as.B. hart-Scott Rodino, other regulatory approvals, third party approvals, ongoing buyer due diligence, tax matters, litigation and changes in the company`s financial condition. Since most (but not all) of the NOC`s adjustment formulas require payment to the seller if the NOC`s closing exceeds the target, the NOC`s adjustment protects the seller against exceptionally positive fluctuations in the NOC that would otherwise give the buyer a chance in the form of excess working capital. This preserves the underlying assumption in most of the United States. M&A treats that the business is operated for the economic benefit of the seller (and at the risk and peril of the seller) until closing.

In most M&A transactions, a portion of the purchase price otherwise payable to the seller is held in trust for a defined period of time to secure one or more of the seller`s obligations to the buyer after closing. Escrow accounts are generally established as security for seller`s general indemnification obligations with respect to its representations and warranties, but need not necessarily be limited to those obligations. The parties may agree to create a single escrow account to secure all potential claims, or to create multiple separate escrow accounts, each of which offers recourse to different obligations of the seller. For example, if the buyer discovers something in care that warrants negotiating extensive rights and remedies, in addition to the standard general indemnification escrow account, they can also negotiate a separate escrow agreement to ensure that funds are available when one of the extended remedies is triggered. Purchase price adjustments for changes in working capital are adjustments to working capital accounts between what the parties know and appreciate at closing and what becomes known after closing when the target company`s books are closed. The main purpose of an NWC adjustment is to protect the buyer from fluctuations in working capital between the purchase price agreement for the target transaction and closing. The buyer usually wants to ensure that they receive an agreed minimum level of working capital in exchange for the purchase price in order to avoid having to increase their investment to meet the need for working capital after closing. Customization metrics. Working capital is the most common purchase price adjustment measure, included in 92% of transactions in the 2019 ABA study.

With the exception of the 69% reported in the 2007 aba study, working capital has been used as an adjustment measure in more than 75% of transactions reported in each ABA study since 2007 – 89% (2017), 83% (2015), 91% (2013), 79% (2011) and 77% (2009). Adjustment measures (j) Generally accepted accounting principles used in the calculation of the purchase price adjustment should be taken into account. For example, debt collection was applied to the invoice shown on the cheque and, if no such invoice is shown on the cheque, to the oldest claim; Provision for bad debts; Ageing allowance. Do not rely on the statement that generally accepted accounting principles must be applied consistently. Sometimes sellers are not consistent in their own practices. Conclusion Many provisions of a M&A purchase agreement reflect a risk allocation between seller and buyer. B for example with regard to financial matters or compliance with the law or labour and employment, which together reflect a compromise of the different perspectives of the parties. On the other hand, purchase price adjustments are considered neutral between the parties.

These provisions, often dollar for dollar, are linked to the purchase price in amounts that should be able to be determined shortly after closing. While adjustment provisions are generally simple, they are nevertheless important to ensure that the parties receive the negotiated economic results and can therefore be subject to a separate escrow account. Separate escrows for purchase price adjustments are increasingly seen in mergers and acquisitions transactions with private companies, and advising buyers and sellers should be prepared to deal with these escrow accounts as they become more common. Buyer`s right to approve the estimated adjustment. Increasingly, there is no explicit right of the purchaser to approve the estimated adjustment to the financial statements. In the 2019 ABA study, 89% of transactions with closing estimates did not have such an explicit right, compared to 84%, 84%, 74%, 68%, 59% and 66% in the previous six studies. Buyer`s right to approve the estimated adjustment If an adjudicative accounting firm is engaged, the parties should consider potential conflicts of interest and determine whether the appointed firm`s fees would be proportionate to the expected amount of a disputed adjustment. The powers of the designated accounting firm should be limited solely to the elements at issue and to the settlement of the disputed elements in the context of the value claimed by the parties. The arbitrator`s decision on the disputed items and the amount of the adjustment is generally final and binding. As a general rule, the arbitrator`s fees are distributed in proportion to the amount of the disputed adjustment decided for and against each party. Purchase price adjustments.

Purchase price adjustments are still common in M&A agreements. In the 2019 ABA study, they were included in 95% of reported transactions. This is an increase of 86%, which in turn was unchanged from 86% in 2015 and compared to previous studies – 85% (2013), 82% (2011), 79% (2009) and 68% (2007). Purchase price adjustments Carefully review working capital adjustments at the beginning of negotiations. Consider the working capital components and accounting policies used by the seller when negotiating the letter of intent. In the purchase agreement, understand and document the assets and liabilities included in the working capital. Determine whether current assets and liabilities are treated in other parts of the agreement, for example. B in the sections on representations and warranties or indemnities. Remember to adjust the provisions for adjusting the purchase price to your situation. True-Up before closing. Increasingly, mergers and acquisitions by private companies involve an estimated purchase price adjustment that is true at closing.

ABA studies show this trend and occurred in 97% of transactions in 2019, 86% in 2017, 89% in 2015, 88% in 2013, 85% in 2011, 76% in 2009 and 64% in 2007. Pre-closing adjustment (f) One item to be negotiated is the one preparing the closing balance sheet, the buyer or the seller. The target company`s balance sheet could be very different at the time of closing and the adjustment could be surprising. .