Key Adjustments in a Purchase Agreement: What Business Owners Need to Know

When negotiating a purchase agreement, several adjustments are typically made to ensure the transaction is fair and reflects the true value of the business being bought or sold. These adjustments can have significant implications for both parties involved. 

Working Capital Adjustments

Working capital adjustments ensure that the buyer receives the business with a normal level of operating capital. This adjustment accounts for changes in current assets and liabilities from the time the purchase price is agreed upon to the closing date.

  • Target Working Capital: A target amount is established, and any deviation from this target at closing is adjusted in the purchase price.
  • Purpose: To ensure the buyer isn’t left with insufficient working capital to run the business post-acquisition.

Net Asset Adjustments

Net asset adjustments are made to reflect changes in the value of the business’s tangible and intangible assets and liabilities.

  • Asset Valuation: Adjustments may be necessary if the value of assets like inventory, equipment, or real estate changes between agreement and closing.
  • Liability Consideration: Any unexpected liabilities discovered during due diligence, such as pending lawsuits or debt, can lead to adjustments.

Earn-Out Adjustments

Earn-out provisions link part of the purchase price to the future performance of the business. This mechanism adjusts the final price based on achieving specific financial or operational targets post-acquisition.

  • Performance Targets: These can include revenue, profit margins, or customer retention rates.
  • Adjustment Mechanism: If targets are met or exceeded, the seller receives additional compensation; if not, the final price may be lower.

Purchase Price Adjustments for Contingencies

Contingencies in a purchase agreement address potential risks or uncertainties identified during the due diligence process. Adjustments ensure that any unforeseen issues that arise post-closing are accounted for.

  • Holdbacks or Escrows: Part of the purchase price may be held in escrow to cover potential liabilities or claims.
  • Reimbursement Clauses: Agreements might include clauses for reimbursement if specific risks materialize within a certain period post-closing.

Closing Date Adjustments

Adjustments are often made to account for the actual financial performance and condition of the business up to the closing date.

  • Prorations: Adjustments for items such as rent, utilities, and prepaid expenses are prorated to ensure each party pays their fair share up to the closing date.
  • Revenue Recognition: Adjustments might be made to ensure revenues and expenses are recognized accurately up to the point of transfer.

Navigating the complexities of purchase agreement adjustments requires expertise and careful consideration. Contact us today to learn how we can assist you in structuring and negotiating your purchase agreement to reflect the true value of your transaction. Understanding and anticipating these common adjustments can help business owners negotiate more effectively and achieve a successful and equitable deal.