The article discusses prevailing approaches/mechanisms to the determination and adjustment of the purchase price in M&A transactions due to potential changes in financial performance in the period between the valuation date and the closing date.
Specifically, the article contains a brief overview and assessment on the basis of several criteria of the three most common mechanisms:
“Fixed Price”
“Locked Box”
“Completion Accounts” (Adjustment Based on Reporting on Closing Date)
The authors also highlight certain features of the Earn-out mechanism that distinguish it from those listed above.
Furthermore, the authors briefly consider the key factors influencing choice of the appropriate mechanism by the parties, which often remains beyond the scope of the work of the transaction lawyers.
For a deeper understanding of the price adjustment, the article also explains the basic concepts of Enterprise Value and Equity Value.