Meaning
Transaction reconciliation processes resolve the differences between estimated financial figures at signing and the actual figures calculated on the closing date. Executing a post closing adjustment ensures that the purchase price is adjusted to reflect the target’s net debt and working capital at the moment of ownership transfer. This mechanism protects both parties from shifts in financial value that occur during the transaction period.
Calculation Base
Typically, the adjustments are based on a draft balance sheet prepared by the buyer within a set period after the closing date. This post closing adjustment calculation compares the target’s actual working capital against a contractually agreed target amount. If the actual working capital is higher, the buyer pays the seller the difference.
Balance Sheet Reconciliation
Once the post closing adjustment has been calculated, the seller has a specific period to review and object to the results. If disagreements arise over the accounting policies used, the parties negotiate to reach a settlement. This step ensures that the final price paid is based on a mutually agreed valuation of the target’s balance sheet.
Dispute Fund
Escrow accounts are often used to secure the payment of any post closing adjustment liabilities. This arrangement ensures that the required funds are available immediately once the final calculations are agreed.