Debt Purchase Price Adjustment Clause

Summary

This debt purchase price adjustment clause provides for adjustment of the purchase price in an acquisition based on outstanding indebtedness of a target entity as of the closing date. This clause includes practical guidance, drafting notes, and alternate clauses. Parties in private M&A transactions often include purchase price adjustments to account for changes in the target company's financial condition or certain specified accounts between signing and closing. However, unlike other purchase price adjustments based on financial metrics, such as working capital, a debt purchase price adjustment typically involves a one-step process, with the final adjustment made at (not after) closing. This is because the target is expected to be cash-free and debt-free upon closing, and buyer will want to ensure that all outstanding debt obligations have been paid in full, and all corresponding security interests released, as of closing. To the extent any further, post-closing adjustments may be warranted, this is typically handled through a working capital adjustment mechanism instead For examples of working capital adjustment provisions, see each of Working Capital Purchase Price Adjustment Clause (Long Form) and Working Capital Purchase Price Adjustment Clause (Short Form). In a debt purchase price adjustment, the purchase price is decreased by the amount of any net debt (i.e., the difference between the target's cash and debt) as of the closing. Alternatively, seller may extract all cash prior to closing and use the transaction proceeds to pay off any outstanding debt at closing in order to convey the target on a cash-free and debt-free basis. As noted above, the parties often use the net debt adjustment in conjunction with a working capital adjustment. Furthermore, if buyer is acquiring the target on a debt-free basis, the acquisition agreement may provide for seller to indemnify buyer for any indebtedness that remains outstanding after closing. Counsel should ensure that the relevant provisions of the acquisition agreement are aligned to avoid any double-counting or overlap between adjustment provisions and indemnification obligations. For further discussion of purchase price adjustments generally and net debt adjustments, see Purchase Price Adjustment Provisions in M&A Transaction Documents.