Purchase and sale agreements for operating businesses, as well as merger agreements, commonly include procedures for adjusting the purchase price based on changes in the working capital of the target business from the time the contract is executed to the closing date. Even when this procedure is detailed, conflicting means of resolving the disputes over the purchase price adjustment can arise. This is particularly true when the purchase price dispute centers on issues that involve Generally Accepted Accounting Principles (GAAP) and that also implicate the agreement's indemnification provisions for GAAP-related representations. As a result, the parties' agreement may contain competing provisions for how to resolve these disputes and in what forum. Whether drafting or litigating these provisions, attorneys need to be aware of how courts may resolve these conflicts.
A Typical Purchase Price Adjustment Provision
Although each acquisition agreement is unique, many contain common elements for a post-closing purchase price adjustment process. In this process, the parties establish some type of reference figure for working capital—either a target figure is agreed upon in the acquisition agreement or a balance sheet is prepared during the due diligence period, usually by the seller (the reference balance sheet). Then a balance sheet is prepared as of the closing date, typically by the purchaser (the final balance sheet). The two balance sheets are compared and—assuming there is no dispute—the purchase price is adjusted up or down based on the difference, according to the terms of the parties' agreement. The agreement will typically require that both the reference balance sheet and the final balance sheet be prepared in accordance with GAAP or consistently with the seller's historical accounting practices, or both.