After the transaction is signed, certain financial adjustments take place.
The most common is the working capital adjustment. A target is normally established in the sales contract. When the transitional financial statements are issued (those used to delimit responsibilities, in particular taxes, vacations), a surplus or a deficit appears. This amount is compensated between the parties according to what is provided for in the contract. Ideally the definitions, calculations, an example are part of the contract or its annexes. The clearer it is – the easier and more Cartesian it is. The goal of adjustments is to remove all emotion and work with reason.
Adjustments to claims, lawsuits, and accounts payable that exceed the date of the adjustment have a slightly longer time horizon. Ironically, in most of our files, the adjustment is in favor of the sellers. We had some, one of our sellers had his personal challenges and the tax reports were not submitted during the transaction. The buyer became responsible for these amounts. In these cases, the parties try to settle between themselves, otherwise the sale price balance is a means of negotiation.
In some cases, equipment breakdowns occurred quickly in transactions. Review the nature of the contract, mutual covenants, inspections, and any due diligence work completed for the transaction before determining who is responsible. These files are more complex, and with experience, your team of professionals can help their client better define the risks.