We finally signed the purchase agreement last Friday. The financial adjustments were the hardest part, working capital peg, debt-like items, capex spend. Took almost three weeks of back-and-forth. My advice: get your accountant and lawyer in the same room early and don't let the buyer's team dictate the adjustment mechanics. Happy to answer questions if anyone is in the middle of this.
Deal Closing
Successfully closing a deal after sorting out all financial adjustments
Congrats. How did you handle the working capital peg? We are stuck on that right now—buyer wants a 12-month average, we think trailing 6 is more representative of current operations.
The peg debate is always a nightmare. We ended up using a 9-month average with a collar. Buyer agreed because it split the difference and nobody had to feel like they lost.
We used trailing 6 months but with a true-up at closing based on actuals. The buyer pushed for 12 initially. What broke the logjam was showing them the monthly seasonality—our Q4 is always heavier, so a 12-month average would have overstated the peg by about 15%. Once they saw the data, they backed off.
Did you have a separate escrow for the adjustment or just a post-closing true-up? Our lawyer is insisting on escrow but the buyer hates the idea.
Post-closing true-up with a cap. No escrow. I know some people swear by escrow but it adds cost and delay. We agreed that if the adjustment exceeds 5% of enterprise value either way, it goes to a neutra accountant. That gave both sides comfort.
What about capex spend? We had a buyer try to argue that maintenance capex should be treated as debt-like becauhse we deferred some equipment replacement last year. That felt like double-dipping.
That is a classic move. They want the benefit of deferred capex in the earnings but then want you to pay for it in the adjustment. We fought that and won by showing the maintenance schedule was consistent with prior years.
Honestly the whole debt-like item list is where deals go to die. Everyone agrees on the big stuff but then you spend two weeks arguing about whether a $40k software subscription that was prepaid is a debt-like item.
Did you use a sell-side quality of earnings report or did the buyer bring their own? We are debating whether to pay for one upfront.
We paid for a sell-side QoE. It was about $18k and worth every penny. It set the baseline for the adjustment discussion and prevented the buyer from coming in with a bunch of surprises. If you can afford it, do it.
Not sure I agree. We skipped the QoE and just gave the buyer access to our accountant. Saved the fee and the deal still closed. Maybe we got lucky.
What was the timeline from LOI to close? We are at 90 days and still haggling over the adjustment language.
LOI to close was 74 days. The last two weeks were almost entirely about the adjustment schedule. One thing that helped was having our accountant on a call with their accountant directly—no intermediaries. They hammered out the mechanics in one session.
That direct accountant call is smart. We tried that but the buyer's CFO kept jumping in and turning it into a negotiation. Next time I will insist on a technical call first.
Anyone have a template for the adjustment schedule they are willing to share? We are building ours from scratch and it feels like reinventing the wheel.