PURCHASE PRICE ADJUSTMENTS - FINANCIAL TARGETS
Nothing can be as frustrating as having to make adjustments to the purchase price based on an audit of accounts receivables, payables, working capital or out of ordinary business activity after an executed purchase agreement. A purchase price adjustment can be detrimental to both parties, but is never a win-win situation. The most common adjustments are based on either working capital or receivables, depending on the size of the deal and structure.
There are a number of ways to avoid having to make adjustments post closing and ensure both parities have done their complete due diligence. We believe in completing a full audit of the company along with a financial model that forecasts for different scenarios to ensure the agreed upon purchase price and deal structure is conservative, realistic and above all transparent to both parties.
Keeping in mind that no two M&A transactions are the same, we believe that every transaction requires a thorough due diligence of the operations, financials and growth forecast. We have in-house expertise in testing the receivables, payables, cash, work in process, human resources, financial statements and working capital requirements for ongoing operations. We believe in getting our minds and hands around the entire organization to ensure we understand its current and longterm prospects.
Furthermore, a detailed analysis of the target working capital, receivable’s, debt or other financial targets pertinent to the transaction must be presented within the purchase agreement with firm targets or ranges. It’s important for both parties to have zero ambiguity on the financial targets and ranges affecting the purchase price.
The goal for both the buyer and seller should be to avoid any surprises, a little legwork and open communication on the front-end will save both parties from having to make adjustments during or after the closing.