Purchase Consideration Adjustments

Various valuation methods are used to determine purchase consideration of assets or securities. Purchase consideration is typically a function of revenue and/or profit/sale margins.

Valuations are usually determined basis the financial statements on a determined date. Oftentimes, however, time may elapse between the valuation date and the completion or closing date. In this intervening period, the value of the security or asset may vary and purchase consideration on the valuation date may no longer be an accurate reflection.

Post-closing adjustments may then be required to be made to the purchase consideration. These adjustments typically cover net working capital available at the time of the transfer, assuming, of course, that the net debt levels of the company remain constant (which in any case is a usually a contractual requirement).?

In most cases, the parties to the transaction will mutually decide on the monthly working capital requirement of the company on a normalised basis; meaning extraordinary and one-time costs and expenses will not be considered. This normalised working capital amount will be compared to the actual working capital available determined as at closing of the transaction and a positive or negative adjustment will have to be made against the normalised working capital.

The? parties will typically protect their respective interests by budgeting for such variations in the working capital by placing the estimated variable amount in an escrow to be paid out on? determination of the final purchase price.

In case of? a non-resident element, parties have to budget for transfer pricing guidelines, and time periods for escrow.