Most transactions aren’t finished at closing. Even after the documents are signed and ownership has changed hands, there are often important post-closing matters to address, including purchase price adjustments, earnouts, and indemnification claims. In some transactions, all three can come into play.

These issues can become contentious even when the parties have spent significant time negotiating and carefully drafting the purchase agreement. The key is to anticipate where disagreements may arise and establish a clear process for resolving them before closing.

Purchase Price Adjustments: Agree on the Methodology

Purchase price adjustments are intended to account for changes in the financial condition of the business between signing and closing, or to true-up the purchase price based on agreed-upon measures such as working capital, cash, or indebtedness.

The challenge often comes when the parties apply the agreed methodology to the actual numbers. Buyer and seller may have different interpretations of accounting principles, historical practices, or the definitions contained in the purchase agreement. Even seemingly straightforward concepts such as “working capital” can generate disagreements over specific accounts and adjustments.

The best way to minimize these disputes is to establish the methodology as clearly as possible before closing. Where appropriate, the agreement should include illustrative calculations, agreed accounting principles, and examples showing how particular items are to be treated. The parties should also establish clear deadlines for delivery and review of the closing statement, specify the information that must be provided, and provide a defined process for raising objections.

If a dispute cannot be resolved, the agreement should identify an independent accountant or other third party who can resolve the disputed items and establish the scope of that person’s authority. The more that can be agreed upon before closing, the less likely it is that the post-closing adjustment becomes a broader dispute over the purchase price.

Earnouts: Define the Rules Before the Game Begins

Earnouts are often used to bridge a valuation gap. A buyer may agree to additional consideration if the business achieves specified revenue, EBITDA, customer, or other performance targets following the closing. On paper, the metrics and deadlines may seem straightforward. In practice, determining whether those targets have actually been met can lead to disputes.

For example, the parties may disagree about how revenue should be recognized, which expenses should be included in calculating EBITDA, how new business should be treated, or whether the buyer’s post-closing decisions affected the company’s ability to reach the earnout target.

The best way to address these issues is to make the earnout provision as objective and detailed as possible. The agreement should clearly define the applicable metrics, accounting principles, measurement periods, reporting requirements, and treatment of extraordinary or discretionary items. It should also address the buyer’s obligations to operate the business during the earnout period and establish what information the seller will receive to verify the calculation.

Just as importantly, the agreement should provide a clear dispute-resolution mechanism. If the parties disagree over the calculation, there should be a defined process for raising objections, exchanging supporting information, and, if necessary, submitting the dispute to an independent accountant or other agreed-upon decision-maker.

An earnout should not simply establish what the seller needs to achieve. It should also establish how the parties will determine whether it was achieved.

Indemnification: Know How Claims Will Be Handled

Indemnification provisions can create another layer of post-closing activity. A buyer may discover after closing that a representation or warranty was inaccurate, that a pre-closing liability was not properly disclosed, or that another indemnifiable loss has occurred. The parties then must determine not only whether a claim exists, but also whether it falls within the negotiated scope of indemnification.

The agreement should establish a clear process for asserting and responding to indemnification claims. Notice provisions, applicable time periods, baskets, caps, exclusions, and the treatment of insurance or other recoveries should all be carefully considered. The parties should also address how third-party claims will be handled, including who controls the defense, the extent to which the other party can participate, and when a settlement requires consent.

One particularly important issue is the level of detail required in a claim notice. Requiring sufficient information to allow the other party to evaluate the claim can help avoid disputes about whether a claim was properly asserted. At the same time, overly technical notice requirements can create unnecessary litigation over procedure rather than the underlying merits of the claim.

Ultimately, the goal should be to create a process that allows legitimate claims to be evaluated and resolved efficiently while protecting both parties’ negotiated rights.

Plan for the Post-Closing Period

The same principle applies across all post-closing matters: the agreement should not simply establish the parties’ substantive rights; it should establish a practical process for determining and enforcing those rights.

Purchase price adjustments, earnouts, and indemnification claims are common features of M&A transactions. None necessarily means that something went wrong with the deal. But without clear definitions, procedures, deadlines, information rights, and dispute-resolution mechanisms, these provisions can become the source of significant post-closing friction.

Closing may be the end of the negotiation over the transaction documents, but it is not necessarily the end of the transaction itself. Careful attention to the post-closing provisions can help ensure that the parties have a clear roadmap for addressing the issues that inevitably arise after the deal closes.

For guidance, contact Vincent Costa at vcosta@cmmllp.com.