Purchase Price Adjustment

Between signing a deal and completing it, a business continues to operate, and its cash, debt and working capital change. Purchase price adjustments ensure the buyer pays for the business as it actually is at completion.

Typically, the parties agree an estimated price at completion based on the seller's estimates. After completion, completion accounts are prepared, showing the actual figures. The price is then adjusted up or down, and any difference is paid.

For example, if the estimated price assumed working capital of 10,000,000 and the completion accounts show 9,500,000, the seller refunds 500,000 to the buyer.

Purchase price adjustments are common in many markets, particularly the United States. Disputes over adjustments often arise from different accounting interpretations, so agreements usually set out detailed accounting principles and a process for resolving disagreements, often involving an independent accountant. The alternative approach, a locked-box mechanism, fixes the price in advance with no adjustments.