Negotiating the M&A Purchase Price Adjustment Provision

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Purchase Price Adjustments (“PPA”, also referred to as Working Capital Adjustments since working capital, or a carefully defined derivative thereof, is the most commonly used metric) are theoretically a “true-up” exercise to ensure the deal consideration paid reflects the actual financial position of the target company at closing. However, M&A deal parties are wise to not assume Purchase Price Adjustments are straightforward or boilerplate language. As the prevalence of PPAs has normalized in recent years (approximately four out of five M&A deals include separate PPA mechanics, up from roughly one half of deals a decade ago), deal parties’ negotiation of the specifics affects the overall business terms of the transaction as well as post-closing activity. When negotiating the PPA, considerations may include the potential size of the PPA surplus, the confidence level in the target company’s estimated financials at the time of closing, the logistics of having to distribute any surplus to a large shareholder base, the effects a potential PPA dispute could have on the post-closing working relationship between the parties, and whether the sellers have the necessary resources available post-closing.

This paper will discuss four common ways drafting purchase price adjustment provisions can swing the balance to buyer- or seller-favorable.

PPA topics include:

  • Whether the buyer is required to deliver a final closing statement
  • Accounting methodology
  • Thresholds and caps
  • Sources of recovery

Corey Quinlan

Director 303.842.4226

Corey collaborates with clients and counsel to finalize and negotiate M&A documents, including escrow, payments, and other agreements. Corey has broad transactional experience and provides guidance on a variety of matters, including earnout, holdbacks, escrows, expense funds, and purchase-price adjustments.

Before joining SRS Acquiom, Corey was an attorney at a regional law firm where he had a broad practice of commercial litigation, real estate, and general business matters. Prior to that, Corey clerked for a district court judge in Arapahoe County, Colorado, helping to manage a busy civil docket.

Corey received his J.D. from the University of Denver Sturm College of Law, and a B.A. in environmental studies – Society and Policy from the University of Colorado – Boulder.

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