A Buyer’s Guide to Purchase Price Adjustments

September 2009
The M&A Lawyer
Jorge L. Freeland

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In the June edition of The M&A Lawyer we published our 2008 Survey of purchase price adjustments in private company acquisition agreements. This is a sister article to Reevaluating Purchase Price Adjustments From a Seller's Perspective published last month in The M&A Lawyer and was written in conjunction with our publication of What to Expect When You are Expecting a Purchase Price Adjustment Dispute (forthcoming with the Practical Law Company), a discussion of the outstanding case law on purchase price adjustment litigation. In this article we seek to identify many of the issues that buyers have encountered while litigating purchase price adjustment disputes and offer some alternatives to avoid these traps for the unwary.

It is quite common in acquiring a private company to have a purchase price adjustment in the calculation of the purchase price. Buyers wish to ensure that the target company is delivered at closing with a predetermined balance sheet (or components thereof) to avoid having their effective purchase price exceed the negotiated one. The purchase price adjustment should be designed to ensure that the seller is motivated to operate the business between signing the acquisition agreement and closing in a fashion that is in the long term best interests of the target company rather than the short term best interests of the seller. The purchase price adjustment combines both accounting and legal principles and typically represents the largest unknown aspect of the purchase price; consequently, it is often considered the most frequent source of post-closing disputes between the parties to private company acquisitions.