Post-closing working capital adjustments is the most common change to the purchase price. Typically, a well-crafted Letter of Intent (LOI) will detail how the adjustments are computed (both positive and negative). Part of the process involves definitions of which assets and liabilities (e.g. related party debt) will be included in adjustments. The other criteria involves whether GAAP is followed, and is it consistent with the seller's past practices. Also, will an audit be required?
If adjustments to the purchase price are mandated, often they are on a dollar-for-dollar basis. Usually, the parties elect to "collar" the adjustment range. A ceiling or cap is defined, which limits the buyer's exposure. Similarly, a floor or lower end amount is stated, limiting the seller's giveback or price reduction. Even with the collar in place, a good practice is to use clear numerical examples in the purchase agreement.
Even with the terms and process well defined, the seller may dispute the adjustment calculation. This apparent dispute can be resolved by the parties or submitted to a more formal dispute resolution procedure, depending on the agreement terms. One key consideration for the investment bank(s) is the definition of "contingent consideration," in light of the adjustments. The end result could affect the banker's success fee.