Post-Closing Purchase Price Adjustment

What does post-closing purchase price adjustment mean?

Post-closing purchase price adjustment (German: Kaufpreisanpassung nach dem Vollzug) describes the contractual procedure in which the provisional purchase price of a company acquisition is reviewed after closing on the basis of the actual reference date figures. A balancing payment then converts it into the final purchase price. The price is provisional because on the closing date, the day the shares are transferred, it can be based only on estimates. As a rule, the items adjusted are financial liabilities, cash and net working capital, that is, the capital tied up in day-to-day business in inventories and receivables less trade payables.

The figures are supplied by the reference date accounts (Completion Accounts). The adjustment clause of the share purchase agreement determines who prepares them, how long the review lasts, how objections are to be raised and who decides on points in dispute. The parties involved are the buyer and the seller, their finance departments and advisers and, in the event of a dispute, an independent expert (Schiedsgutachter). With a locked box mechanism there is no such procedure; there, only the claim for reimbursement of impermissible value leakage remains.

Subject matter of the purchase price adjustment

Every item that appears with its reference date value in the purchase price formula is determined, that is, in the bridge from enterprise value to the purchase price for the shares (Equity Bridge). Three blocks are at the centre:

• Financial liabilities and debt-like items: bank loans, shareholder loans, lease liabilities as defined in the contract, accrued interest, costs of early repayment and items such as tax liabilities for periods before closing. The dispute here is mainly about completeness.
• Cash: cash on hand and bank balances, reduced by restricted amounts such as rent deposits in blocked accounts, pledged balances or funds that can be repatriated from foreign subsidiaries only at a cost. What is freely available is contested.
• Net working capital: inventories, receivables and operating liabilities, measured against the agreed target value (Working Capital Adjustment). Most valuation questions lie here, for example regarding valuation allowances and provisions.

Reference date and value clarification

What counts are the circumstances on the reference date. The principle of value clarification (Wertaufhellung) is set out for the annual financial statements in Section 252(1) no. 4 of the German Commercial Code (Handelsgesetzbuch, HGB): information obtained after the reference date but relating to circumstances on that date is taken into account. Events that occur only afterwards are disregarded. The line is hard to draw in individual cases. Contracts therefore often specify a point in time up to which new information may be taken into account and expressly exclude measures taken by the buyer after closing, such as new restructuring provisions.

Process and deadlines of the purchase price adjustment

1. Preparation of the reference date accounts. The buyer, who has the accounting records after closing, submits the reference date accounts within an agreed period, commonly 60 to 90 days. If the buyer misses it, some contracts provide that the seller's estimate becomes binding or that the seller may prepare the accounts itself.
2. Review. Within the review period, often 30 to 60 days, the seller receives access to books, vouchers, working papers and the responsible employees.
3. Objections. They must be raised in writing, with reasons and quantified. Items without an effective objection are deemed determined under customary contract drafting.
4. Settlement phase. For a set period, the parties negotiate the disputed items, often involving their auditors.
5. Expert determination. Items on which no agreement is reached are submitted by one party to the independent expert.
6. Balancing payment. The difference between the provisional and the final purchase price is paid within a few banking days, primarily from an escrow account and, if so agreed, with interest from the closing date.

The independent expert

An independent audit firm that neither audits nor advises the buyer or the seller is usually appointed as the independent expert. The contract names it or specifies which neutral body appoints it if the parties cannot agree. Legally, this is regularly an expert determination (Schiedsgutachten) to which Sections 317 to 319 of the German Civil Code (Bürgerliches Gesetzbuch, BGB) apply by analogy. It is not an arbitration under the German Code of Civil Procedure (Zivilprozessordnung, ZPO), in which a private arbitral tribunal decides a legal dispute in place of the state courts. The expert's opinion binds the parties as long as it is not manifestly incorrect.

The clause also regulates the scope of the mandate. It is usual for the expert to decide only on the disputed items, to be bound by the contractual accounting rules and not to be permitted to fix any value outside the range between the parties' positions. Whether the expert may also answer questions of interpretation that matter for the accounting should be regulated expressly.

Relationship to warranties and other claims

The purchase price adjustment is part of the price determination, not liability for breaches of duty. As a rule, therefore, neither baskets nor liability caps nor knowledge provisions apply to it, as they are agreed for warranties. This creates an incentive to shift matters from warranty liability into the adjustment. A buyer then asserts, for example, a bad debt as a valuation allowance in the reference date accounts instead of making a warranty claim on the receivables.

Purchase agreements therefore regularly contain a prohibition of double recovery: what is captured in the reference date accounts does not give rise to a warranty or indemnity claim, and vice versa. Coordination is also needed with the tax indemnity for periods before closing and with an Earn-Out, whose settlement often follows the same pattern with an objection period and an independent expert. Whether the buyer may set off balancing claims against earn-out payments is determined by the contract.

Worked example: purchase price adjustment with expert determination

An IT service provider is sold at a provisional purchase price of EUR 22.0 million, of which EUR 1.0 million is held in an escrow account. 75 days after closing, the buyer submits the reference date accounts and calculates a reduction of EUR 600,000:

• (a) accrued interest on a bank loan, not included in the estimate: EUR 80,000
• (b) rent deposit in a blocked account, counted as cash in the estimate: EUR 120,000
• (c) specific bad debt allowance in full on receivables from three customers that are more than 90 days overdue: EUR 250,000
• (d) new provision for an expected loss on a customer project: EUR 150,000

The seller accepts (a) and (b) and raises reasoned objections to (c) and (d) within the deadline. The settlement phase produces no result, and the independent expert decides:

• Undisputed: EUR 80,000 plus EUR 120,000 = EUR 200,000
• On (c): The contract prescribes a flat-rate allowance of 40% for receivables more than 90 days overdue, as long as the customer is not insolvent. None of the three customers is insolvent, so EUR 250,000 × 40% = EUR 100,000 is applied
• On (d): The loss is based on a price reduction that the company granted only after closing. The event falls after the reference date, so EUR 0 is applied
• Final reduction: EUR 200,000 plus EUR 100,000 = EUR 300,000; final purchase price EUR 22.0 million minus EUR 0.3 million = EUR 21.7 million
• Escrow account: EUR 300,000 to the buyer, EUR 700,000 to the seller; the seller thus receives EUR 21.0 million at closing plus EUR 0.7 million, in total EUR 21.7 million
• Costs of the independent expert of EUR 60,000: Of the disputed EUR 400,000, the buyer prevails with EUR 100,000 (25%), the seller with EUR 300,000 (75%). The buyer therefore bears 75% of the costs, that is EUR 45,000, and the seller 25%, that is EUR 15,000

The example shows two typical causes of dispute: valuation discretion, which a fixed contractual rule limits, and the distinction between circumstances on the reference date and later events.

Distinctions: purchase price adjustment, purchase price allocation and warranties

• Completion Accounts: the reference date accounts themselves, that is, the numerical basis. The adjustment procedure determines how a binding purchase price results from these accounts.
• Warranty and indemnity claims: compensate for disadvantages resulting from the breach of contractual assurances, with their own liability limits and deadlines (Indemnification).
• Earn-Out: measures part of the purchase price by performance in the years after closing, not by values on the reference date.
• Purchase price allocation (PPA): distributes the final purchase price in the buyer's financial statements across the acquired assets and liabilities, the remainder being goodwill. It does not change the purchase price. Because both terms can be abbreviated as PPA, they are easily confused.

Common mistakes

• Objections without reasons. A blanket rejection of the entire statement usually does not meet the contractual requirements; the items not specifically challenged are then deemed determined.
• Missed deadlines. The deadlines run from receipt of the statement and generally operate as preclusion periods. The review must therefore be prepared before the statement arrives.
• No access to information. Without a contractual right to inspect accounting records, vouchers and working papers, the seller cannot substantiate objections.
• Incomplete expert clause. If rules on selection, scope, procedure and costs are missing, the procedure is disputed first and the figures only afterwards.
• No rule on value clarification. Without an information cut-off date and an exclusion of buyer measures after closing, later decisions can be carried into the reference date accounts.
• Overlap with warranties. If the prohibition of double recovery is missing, the same matter can reduce the price and additionally trigger a warranty claim.

Frequently asked questions

Is the post-closing purchase price adjustment limited in amount?

As a rule, no. The adjustment is part of the purchase price determination and works euro for euro in both directions. The parties can, however, limit it, for example by a collar, a one-sided design or a maximum amount equal to the retention.

What happens if the seller misses the objection period?

Under customary contract drafting, the buyer's reference date statement becomes binding. A later correction is then possible only in narrow exceptional cases, for example in the event of deception by the other side.

Can the independent expert's decision be challenged?

Only to a limited extent. The expert determination is binding as long as it is not manifestly incorrect. It is not enough that a different valuation would have been tenable; the error must be obvious to a knowledgeable observer.

Who pays the independent expert?

The contract regulates this. A common approach is allocation in proportion to success and failure on the disputed items, which makes excessive positions expensive. Alternatively, both sides bear the costs in equal shares.

Is interest charged on the balancing payment?

Often yes. Contracts frequently provide for interest from the closing date until payment, so that neither party benefits from a delay. If there is no provision, interest comes into consideration only under statutory rules, above all in the case of default.

The Roemer Capital view

After closing, Roemer Capital accompanies sellers through the review phase. It checks the buyer's reference date statement item by item against the contractual accounting rules and the sample calculation. Every deviation is quantified, and the objections are prepared so that they meet the formal requirements of the contract.

The deadlines are short. Roemer Capital therefore determines before closing which documents and contact persons the seller needs for the review and ensures that access is secured in the contract. The legal assessment and representation in the expert determination proceedings rest with the client's law firm.