Share Purchase Agreement Price Adjustment
Differences of opinion on working capital adjustments are common. Many of the differences of opinion on working capital adjustments are due to unclear language in the sales contract and flexibility in the application of universally accepted accounting standards. Since most (but not all) NWC adjustment formulas require payment to the seller when the NWC`s financial statements exceed the target, the NWC adjustment protects the seller from abnormally positive fluctuations in NWC that would otherwise give the buyer a chance in the form of excess working capital. This preserves the underlying assumption in most of the United States. M&A agreement under which the transaction is operated until the conclusion to the economic advantage of the seller (and the risk of the seller). After the buyer has provided its calculation of the adjustment, the seller and its accountants normally have a set period of time to verify the buyer`s calculation, request and verify supporting records, and formulate written objections to the buyer`s calculation. If the seller does not send a written objection by a specific date, the buyer`s calculation becomes final. On the other hand, when the seller files objections, there is usually a delay for the parties to negotiate and try to resolve the seller`s objections. While not all objections are resolved, most agreements provide for a mandatory private arbitration procedure, usually by a mutually agreed audit firm. Typical post-closing adjustment provisions focus on the target entity`s liabilities and assets which, as a result of the activity, vary between the date on which the parties agree on a purchase price and the actual conclusion of the transaction, which may be months after the initial price agreement. The most common adjustments are based on the difference between net real assets outstanding (NWC) from target to closing and an agreed target amount expected in the financial statements. The main purpose of NWC`s adjustment is to protect the buyer from fluctuations in working capital between the date of agreement of a purchase price for the target transaction and the conclusion.
The buyer usually wants to be sure to receive a minimum of agreed working capital in exchange for the purchase price, in order to avoid having to increase their investment to meet working capital needs after closing….