M&A Post-Closing Purchase Price Adjustments: Drafting and Negotiating Strategies

Description

PPA provisions are a commonly used mechanism in M&A transactions to enable the buyer to ensure that it receives the target company upon closing with sufficient net working capital (NWC) to be able to support its operations so that the buyer doesn't need to make an infusion of cash into the target company soon after closing. PPA provisions can also be used to adjust purchase price based on the target company's net assets, inventory, cash balance, accounts receivable collections, and other financial measures.

PPA provisions can also be a way for the buyer to claw back some of the purchase price paid for a target company with improperly calculated financial measures, so the purchase price that it pays corresponds to the target company's actual value. However, for sellers of companies in M&A transactions, PPA provisions can severely adversely impact their net sale proceeds and therefore need to be carefully crafted by their counsel to protect their rights.

Counsel drafting PPA provisions must focus on several essential issues. The issues include defining the elements of NWC or other financial measures for the PPA, setting the target amount, specifying the accounting principles for the PPA calculation, and attaching example calculations to the acquisition agreement. Legal advisers must also analyze the burden of proof, determine a mechanism for resolving PPA-related disputes, determine a mechanism for payment of amounts due on completion of the PPA, and grasp the overlap between PPA, general indemnification, and tax indemnification provisions.

Listen as our authoritative panel of M&A attorneys discusses considerations and best practices for deal counsel when drafting and negotiating PPA provisions in the acquisition agreement.