A purchase price adjustment (PPA) is a mechanism used by parties in private-target M&A transactions to confirm or true-up the value of the target business at closing. In most M&A transactions, the purchase price offered by the buyer is determined in part on the target company’s most recently prepared financial statements (usually from the end of the most recent quarter or fiscal year). Most PPA’s are based on categories such as working capital, net worth (or net assets) and EBITDA. In some deals, the buyer may adjust the purchase price based on the occurrence or non-occurrence of certain events (for example, if the closing does not occur by a drop dead date).
A working capital adjustment is a type of PPA that occurs when a PPA is based on the working capital (current assets minus current liabilities) of the target company, or a similar formula such as cash, net cash, or other related measurement.
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