Net Asset Value Purchase Price Adjustment Clause

Summary

This net asset value purchase price adjustment clause provides for adjustment of the purchase price based on deviation from a target net asset value amount in a private company acquisition. 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 to the target company's financial condition or certain specified accounts between signing and closing. Net asset value refers to the total book value of assets less the total book value of liabilities, and for purposes of the adjustment mechanism is typically limited to only those assets and liabilities that are included in the transaction. However, there is no one-size-fits-all model for calculating net asset value, and the parties should tailor the net asset value calculation and adjustment to the specific target business and terms of the transaction. To explore market trends and view representative transaction agreements of publicly filed transactions, see Market Trends 2023: Purchase Price Adjustments and Market Trends 2023: Earn-Outs in Public-Private Deals. Click here to see recent examples of purchase price adjustment provisions, earn-outs, and escrows in publicly filed transaction agreement in Market Standards—M&A, the Practical Guidance database of publicly filed M&A deals that enables users to search, compare, and analyze transactions using 150+ M&A deal points to filter search results. You can customize any search to your needs by adding filters or modifying the search criteria. Relationship with Other Provisions The manner in which the purchase price adjustment and indemnification provisions in an acquisition agreement work together should be examined to ensure that one party cannot obtain recovery under both provisions of the agreement. Moreover, indemnification obligations are often subject to negotiated limits, such as deductibles, thresholds, and caps, which are not usually found in purchase price adjustment provisions. Therefore, if a party has an alternate or additional mechanism through a purchase price adjustment clause for obtaining recovery upon the occurrence of a certain event, the parties' carefully negotiated constraints on indemnifiable liabilities can be rendered meaningless. In addition to the indemnification provision, the parties should pay attention to covenants relating to the operation of the target business in the period between signing and closing. Certain interim operating covenants, such as those involving sales of assets and capital expenditures, must be thoughtfully drafted to safeguard against a seller manipulating one or more components of net asset value to produce a seller-favorable price adjustment. Disputes A purchase price adjustment provision often is subject to a different dispute resolution mechanism than that which governs much, if not all, of the remainder of an acquisition agreement. The majority of adjustment provisions contemplate using a third-party expert, such as an accountant, to solve disputes relating to particular aspects of the purchase price adjustment between the parties. The provision should address how the parties will allocate the costs of any such third-party expert. For further discussion of purchase price adjustments generally and net asset value adjustments, see Purchase Price Adjustment Provisions in M&A Transaction Documents. To explore market trends and view representative transaction agreements of publicly filed transactions, see Market Trends 2023: Purchase Price Adjustments and Market Trends 2023: Earn-Outs in Public-Private Deals. Click here to see recent examples of purchase price adjustment provisions, earn-outs, and escrows in publicly filed transaction agreement in Market Standards—M&A, the Practical Guidance database of publicly filed M&A deals that enables users to search, compare, and analyze transactions using 150+ M&A deal points to filter search results. You can customize any search to your needs by adding filters or modifying the search criteria.