Understanding the purchase-price-adjustment clause
Whether in a section 363 asset sale or other structure, after a transaction, the parties are typically contractually bound by a post-closing purchase-price-adjustment clause, demanding calculation of adjustments to the purchase price. The adjustments compensate either the buyer or seller for target balance differences—otherwise known as “pegs” —for items such as inventories, working capital or net assets and actual balances at the close of the transaction.
However, no matter how objectively conceived and drafted a post-closing purchase-price-adjustment clause is, disputes over the calculation and interpretation of adjustments are frequent, and can be very disruptive. Understanding how these purchase-price-adjustment processes are structured is critical to managing risks of potentially costly disputes and preserving the projected benefits of a transaction.
Counterparties within an acquisition have differing, and sometimes competing, interests. Buyers seek to pay no more than their defined price to realize the expected value and will conduct due diligence to evaluate the seller’s assets with the goal of reducing the purchase price. On the other hand, sellers seek to eliminate post-closing risks and reduce unfavorable post-closing purchase-price adjustments to maintain or increase the buyer’s price.
Common disputed items during purchase-price-adjustment include:
- Choice of GAAP
- Past practices vs. GAAP
- Reporting period
- Subsequent events
Details often vary, but the ultimate focus of purchase-price-adjustment disputes focus on whether GAAP was consistently applied over a relevant time period prior to the transaction. If not, the damages can be significant.
Read a recent article published in the American Bankruptcy Institute’s ABI Journal with RSM US LLP’s Boris J. Steffen to better understand purchase-price structures, mitigate related risks and ultimately realize the expected value from a transaction.