Post-closing adjustment: Overview, definition and example
What is a post-closing adjustment?
A post-closing adjustment refers to a modification made to the terms of a transaction after the closing of a deal, typically in the context of mergers, acquisitions, or the sale of assets. These adjustments are made to ensure that the final purchase price reflects the actual financial condition of the business or asset being transferred. Post-closing adjustments are often based on financial metrics such as working capital, debts, or other factors that could change between the signing of the deal and the actual closing. The adjustment process is generally defined in the transaction agreement and aims to resolve any discrepancies between the estimated and actual value at the time of closing.
For example, if the agreed-upon purchase price for a business was based on an estimated working capital amount, a post-closing adjustment would be made if the actual working capital figure is higher or lower than expected.
Why is a post-closing adjustment important?
A post-closing adjustment is important because it ensures fairness and accuracy in a transaction. Since certain financial elements (like working capital or debt) can fluctuate between the time a deal is agreed upon and when it closes, post-closing adjustments help correct any imbalances. This protects both the buyer and the seller by aligning the final transaction price with the actual value of the assets or business. It also helps avoid disputes and provides a mechanism for resolving any discrepancies that may arise after the deal has closed.
For buyers, post-closing adjustments help ensure they are paying an appropriate price based on the actual financial condition of the target business or asset. For sellers, it provides a clear method for handling any unexpected changes in financial metrics after the deal closes.
Understanding post-closing adjustment through an example
Imagine a company buys another business for $10 million, based on an estimated working capital of $1 million. After the deal closes, an audit reveals that the actual working capital is $1.2 million. A post-closing adjustment would then be made, increasing the purchase price by $200,000 to reflect the higher working capital, ensuring that the buyer pays the fair value.
In another example, a business is sold with an agreement to adjust the purchase price based on the amount of debt held by the target company at closing. If the target company’s debt is higher than estimated, a post-closing adjustment may reduce the purchase price to reflect the additional liability.
An example of a post-closing adjustment clause
Here’s how a post-closing adjustment clause might appear in a contract or agreement:
“The Parties agree to a post-closing adjustment to the purchase price based on the final calculation of working capital, as determined by the Buyer’s accountant within 60 days following the Closing Date. If the final working capital exceeds the estimated amount by more than $100,000, the Seller shall pay the Buyer the difference, or if the final working capital is less than the estimated amount by more than $100,000, the Buyer shall pay the Seller the difference.”
Conclusion
A post-closing adjustment is a crucial component of many transactions, particularly in mergers and acquisitions, that ensures the final purchase price reflects the actual financial condition of the business or asset being transferred. These adjustments protect both parties by providing a clear and fair mechanism to address discrepancies that may arise between the agreed-upon and actual values. Understanding post-closing adjustments helps both buyers and sellers ensure that the transaction is completed on equitable terms, with final amounts adjusted to reflect true values.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.