Meaning
Financial adjustment processes take place after the acquisition of a company to compare the actual working capital on the closing date with the target working capital specified in the purchase agreement. This post-closing working capital reconciliation ensures that the final purchase price reflects the true liquidity, inventory, and receivables of the business at the moment of transfer. The procedure ends once both parties agree on the final balance sheet or the disputed items are settled by an independent accountant.
Adjustment Mechanism
Sellers must deliver a draft closing balance sheet within a specified period, usually thirty to sixty days after the transaction closes. During this post-closing working capital reconciliation, the buyer can dispute specific inventory valuations, old receivables, or unrecorded liabilities to reduce the final cash paid to the seller. This claw-back mechanism protects the buyer from paying for artificial or non-existent assets.
Escrow Allocation
Settlement of any disputed amounts is typically drawn from a dedicated purchase price adjustment escrow account established at closing.
Strategic Drafting
Corporate lawyers spend significant time defining the exact accounting principles and historical practices that govern the calculation of these balance sheet items. If the post-closing working capital reconciliation is governed by vague or conflicting accounting standards, it often leads to post-deal disputes and arbitration. Clear definitions of working capital items are therefore vital to secure a clean exit.
