Adjustment to the Purchase Price / Purchase Price Adjustment

Definition

Adjustments to the value of working capital, made after the closing, that affect the purchase price.

Example

If the estimated working capital is $500,000 upon acceptance of a letter of intent (LOI), but the working capital amount is calculated at $300,000 after the closing, then the purchase price is reduced, or adjusted, by $200,000.

Tips

• Working capital is calculated as the value of accounts receivable, inventory, and pre-paid expenses, less the value of accounts payable, short-term debt, and accrued expenses.
• An adjustment to purchase price is common in middle-market transactions, where working capital is often included. That amount is estimated at the closing, and then an adjustment is made between 30 and 90 days after the closing when accurate financial reports are available so that the figure can be accurately counted.