Post Closing Adjustments
After the deal has closed, both buyer and seller still have responsibilities. It can take months or years before all terms of the deal have been fulfilled.
1 Working Capital Adjustment (True-Up)
The purchase price for the business includes working capital (current assets less current liabilities). However, this is not the actual amount of working capital on the financial statements at the date of closing, but the amount of working capital estimated to be required to support the current level of the business’s performance. The buyer and seller negotiate the amount required.
Once the financial statements at the date of closing are verified, there will be an adjustment to the purchase price reflecting the difference between the actual working capital and the amount agreed upon.
This may cause disagreements in cases where the buyer and seller have differences of opinion in the accounting principles and methods used to calculate various parts of working capital, such as:
- Work-in-progress
- Bad debt reserves against accounts receivable
- Reserves against inventory
- Accrued liabilities, such as wages or vacation pay
These disagreements may lead to further negotiations and possible adjustments to the purchase price.
2 Collection Of Any Funds Held Back
Funds held in escrow give the buyer some assurance that the seller’s representations and warranties will hold up. The M&A advisor can assist on contentious issues regarding the release of any funds held in escrow.
3 Fulfillment Of Seller’s Duties & Obligations
If your client agreed to stay with the company for a period of time, he will have to fulfill that obligation.
4 Managing And Collecting Earn-Outs & Seller Financing Payments
Your client should appoint someone to manage and collect earn-outs and seller financing payments—especially with an earn-out, as the client needs to ensure that he is getting all he deserves. Usually the lawyer or M&A advisor will handle this.