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. Adjustment arrangements after the end of the period require special attention. Disputes are frequent and mistakes can be very costly. A team approach to negotiating these provisions is crucial – the parties` internal staff and their respective advisors, accountants and financial advisors should all be involved in order to minimize costly litigation. The seller wants an «apples with apples» comparison of the NTA or closing NWC to prevent the buyer from playing the adjustment by changing the accounting rules. Similarly, buyers should also strive to be clear about how the seller applies the accounting policies and procedures relevant to its financial statements so that they can be applied consistently in any post-closing adjustments. (See a recent warning from McGuireWoods about a Delaware case that examines the purchase price adjustment provision after entering into a purchase agreement.) Attaching a sample NTA or NWC calculation as a schedule to the purchase contract can help minimize litigation. The NOC`s adjustment also reduces the seller`s incentive to manipulate working capital by speeding up debt collection, delaying liabilities and taking other steps to maximise liquidity distributable to the seller before closing. Customary post-closing adjustments are based on changes in the target company`s working capital, net assets or net asset value. A change in net working capital is a common basis for an adjustment to the purchase price and is at the center of this reservation. The definition of working capital is current assets minus current liabilities. Working capital is a good measure of the target company`s needs to operate its business as a management company. The accounting treatment of non-current assets often does not reflect fair value either.

«Working capital shall be calculated at the balance sheet date in accordance with generally accepted accounting principles (`GAAP`), which shall be applied uniformly. If the working capital is greater than x US dollars, the purchase price will be increased by the amount of this excess. If the working capital is less than x United States dollars, the purchase price is reduced by the amount of this deficit. » 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 Approval of the Estimated Adjustment In addition to understanding the structure and mechanisms of a post-closing purchase price adjustment, a transaction team should carefully review the terms of the entire agreement, in particular how the compensation provisions interact with post-closing purchase price adjustments. The seller`s lawyer will want to ensure that the purchase agreement does not allow the buyer to engage in a «double dip» by making a claim for the same item in both the post-closing adjustment and a set-off provision. The seller will also want to exclude all possibilities for the buyer of «double dip». A double dip would occur if the buyer claims the same items both in the post-closing adjustment and under the indemnification provisions of the agreement. Seller must also ensure that no items were counted twice in the initial purchase price adjustments for debt and the initial NTA or NWC adjustment at closing. 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. 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 (e) Note when the acquisition agreement requires consistency between the pre-closing closing at which a purchase price was negotiated and the final closing statements. Interim communications may not have the strict cut-off procedures used in a final declaration. 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 policies 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 holidays and bonuses, pro-rated expenses and other industry-specific problematic elements of the target company. Creating the initial adjustment calculation. According to ABA studies, the buyer now almost always prepares the first purchase price adjustment calculation after completion (if one is to make one). .