Purchase Price Adjustment Provisions in M&A Transaction Documents


Summary

This practice note discusses considerations in negotiating and drafting purchase price adjustments in acquisition agreements. A purchase price adjustment provision provides a mechanism by which the agreed purchase price in an M&A transaction may be increased or decreased as a result of changes to the target company's financial condition or certain specified accounts between signing and closing. A typical formulation compares a particular financial metric or value (e.g., net working capital or net asset value) as of closing to an agreed target amount (which may be an agreed dollar amount or a reference to the amount of such metric as reflected in a recent balance sheet of the target), with a dollar-for-dollar upward or downward adjustment to the purchase price in the amount of such difference. Purchase price adjustments are generally implemented to better reflect the bargain struck by the parties at signing by allowing the buyer to ensure that the final purchase price is based on the ...