M&A 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. The parties usually agree to some normalized level of NWC required to be delivered at closing. These PPA provisions also ensure that sellers get the benefit of any excess NWC delivered upon 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 that are relevant to the business of the buyer and the target.

In addition, PPA provisions can also be a way for the buyer to reduce some of the purchase price paid for a target company with improperly calculated financial measures, such as indebtedness and transaction expenses, 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 significantly and adversely impact their net sale proceeds and therefore need to be carefully crafted by their counsel to protect their rights and avoid things like double counting and shoehorning NWC items into "dollar for dollar" adjustments for debt or transaction expenses.

Counsel drafting PPA provisions must focus on several issues. Some of the more essential issues include defining the elements of NWC or other financial measures for the PPA, specifying the accounting principles for the PPA calculation, and attaching example calculations to the acquisition agreement to guide the parties and ensure consistent calculation. Legal advisers must also determine a mechanism for resolving PPA-related disputes, determine a mechanism for payment of amounts due on completion of the PPA and for estimates at closing and dispute resolution fees, and grasp the overlap between PPA, general indemnification, and tax indemnification provisions.

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