A post-closing adjustment agreement is a legal document that provides a mechanism for adjusting the purchase price of a business after the closing date. This agreement is common in mergers and acquisitions, where the purchase price of a business is often subject to change based on certain conditions or events.
The purpose of a post-closing adjustment agreement is to ensure that both parties are fairly compensated for any changes to the business that occur after the transaction is completed. For example, if the business experiences a significant increase in sales or revenue shortly after the purchase, the buyer may be entitled to receive additional compensation. Conversely, if the business experiences a decline in performance, the seller may be entitled to a refund.
The terms of a post-closing adjustment agreement are typically negotiated and agreed upon prior to the closing of the transaction. The agreement will outline the specific conditions or events that can trigger an adjustment to the purchase price, as well as the methodology for calculating any adjustments. The agreement may also include provisions for dispute resolution in the event that the parties disagree on the amount of the adjustment.
One common type of post-closing adjustment agreement is a working capital adjustment. This type of adjustment is designed to account for changes in the business`s working capital (i.e. current assets minus current liabilities) between the closing date and the target working capital amount. If the actual working capital is higher than the target, the buyer may be entitled to a payment from the seller, and if the actual working capital is lower, the seller may be entitled to a refund.
Another type of post-closing adjustment agreement is an earnout agreement. This type of agreement is designed to account for changes in the business`s performance after the closing date. Under an earnout agreement, a portion of the purchase price is held in escrow and is only paid out if certain performance targets are met.
Post-closing adjustment agreements can be complex legal documents with significant financial implications for both parties. As such, it is important to seek the advice of experienced legal and financial professionals when negotiating and drafting these agreements. By carefully considering the potential risks and benefits of a post-closing adjustment agreement, both buyers and sellers can ensure that they are adequately compensated for any unforeseen changes to the business after the transaction is completed.
