A mechanism used by buyers in private M&A transactions to confirm the value of the target company or business at closing. In most M&A transactions, the purchase price offered by the buyer is determined in part on the most recently prepared financial statements (usually the end of the most recent quarter or fiscal year) of the target company or business. Buyers use purchase price adjustments to protect themselves against any decreases in the value of the target company (or a depletion in its working capital) during the period between the date the target company or business was initially valued and the closing.

Most purchase price adjustments are based on financial statement items (such as working capital, net worth (or net assets), and EBITDA). For an example of a working capital adjustment, see Standard Clause, Stock Purchase Agreement: Working Capital Purchase Price Adjustment Provision.

In some deals, the buyer may adjust the purchase price on the occurrence or non-occurrence of certain events (for example, if the closing does not occur by a drop-dead date). For these types of adjustments, the purchase price is generally increased or decreased by a fixed amount.

For more information on purchase price adjustments, see Practice Note, What's Market: Purchase Price Adjustments.