Negotiating the M&A Purchase Price Adjustment Provision

Purchase Price Adjustments (“PPA”, also referred to as Working Capital Adjustments since working capital, or a carefully defined derivative thereof, is the most commonly used metric) are theoretically a “true-up” exercise to ensure the deal consideration paid reflects the actual financial position of the target company at closing. However, M&A deal parties are wise to not assume Purchase Price Adjustments are straightforward or boilerplate language. As the prevalence of PPAs has normalized in recent years (approximately four out of five M&A deals include separate PPA mechanics, up from roughly one half of deals a decade ago), deal parties’ negotiation of the specifics affects the overall business terms of the transaction as well as post-closing activity. When negotiating the PPA, considerations may include the potential size of the PPA surplus, the confidence level in the target company’s estimated financials at the time of closing, the logistics of having to distribute any surplus to a large shareholder base, the effects a potential PPA dispute could have on the post-closing working relationship between the parties, and whether the sellers have the necessary resources available post-closing.

This paper will discuss four common ways drafting purchase price adjustment provisions can swing the balance to buyer- or seller-favorable.

PPA topics include:

• Whether the buyer is required to deliver a final closing statement
• Accounting methodology
• Thresholds and caps
• Sources of recovery