Corporate Finance Advisory | J.P. Morgan

Investment Banking publications

Banking Investment / May 15, 2016

Too often, sellers sign an LOI that fails to address many of the key provisions that commonly trigger post-closing adjustments.

Experienced advisors understand the leverage they can exert to address additional issues early and will seek to get as much seller-advantaged detail as possible into the LOI. While knowing when and how hard to press these issues can be more art than science, establishing key terms with regard to the following issues at the LOI stage can significantly improve a seller’s ability to rest easy after a transaction’s close:

Closing Balance Sheet Adjustments
Almost all deals come with closing balance sheet adjustments. Day-to-day changes in working capital are inevitable and must be considered. Sellers need to avoid buyers aggressively using closing balance sheet adjustments as a means to claw back some of the agreed upon purchase price.

Most transactions are structured on a “cash free, debt free” basis. Generally speaking, this means that the buyer does not pay for cash or marketable securities, and does not assume any long term debt. On the day of closing, any excess cash and cash equivalents on the balance sheet will increase the purchase price dollar-for-dollar, while the seller will be responsible for paying off all long term debt. Receivables, payables and working capital related items typically remain with the company (i.e., the buyer) as necessary components of the ongoing balance sheet.