Meaning
The post-closing reconciliation mechanism where the final purchase price is adjusted based on actual financial metrics at the closing date. Executing a purchase price true up ensures that the final amount paid reflects the actual value of the working capital and debt of the business when ownership transfers. This process prevents either party from being disadvantaged by changes in the company’s financial position during the closing period.
Closing Balance
The seller prepares a balance sheet as of the closing date, usually within sixty to ninety days after the transfer. This balance sheet is audited or reviewed by the buyer’s accountants. The actual numbers are compared to the estimates used to set the initial purchase price.
Adjustment Dispute
Discrepancies between the estimated and actual balance sheet numbers can lead to disagreements between the parties. The purchase agreement contains detailed rules for how these disputes are to be resolved. An independent accounting firm is often appointed to make a final, binding decision.
Escrow Integration
To ensure that any true-up payment is made quickly, a portion of the purchase price is often held in a specific adjustment escrow account. This account provides a secure source of funds for the true-up payment. It is separate from the indemnity escrow account.
