A purchase and sale agreement (SPA) does more than document a transaction. Its definitions, accounting principles and purchase price mechanisms can directly affect the value exchanged between buyer and seller. 

Because the financial picture at signing or closing is typically an estimate, SPAs often include mechanisms that will guide the ultimate calculation of the final purchase price  including adjustments for debt,cash and net working capital. Ambiguity that seems manageable during negotiations can become much more consequential when actual dollars are at stake. Clearly defining cash, debt and net working capital, along with the accounting principles governing the related calculations is imperative to avoid potentially significant economic consequences after closing.   

It is also critical to address potential issues early in the negotiations of the SPA terms, so buyers and sellers reduce uncertainty, preserve deal value and mitigate disputes that may arise after closing. 

Small details can have a significant impact 

Under a closing accounts mechanism, the SPA establishes how components of the final purchase price will be calculated. While the headline purchase price and target working capital may be stated as dollar amounts, much of the ultimate calculation depends on definitions within the SPA. 

Those definitions determine what qualifies as cash or debt, what assets and liabilities comprise net working capital and which accounting principles govern the calculation. Such definitions should be based on the diligence findings. 

Working capital deserves particular attention because it often involves significant judgment, especially around reserves and accruals. When those judgments directly affect the purchase price, differences between buyer and seller can become economically significant. 

Consistency in accounting principles is equally important. If closing working capital is calculated differently from the methodologies used in calculating target working capital, the resulting adjustment may reflect a change in methodology rather than a change to the underlying economics of the business, artificially shifting deal value between buyer and seller. 

The mechanism should reflect the economics the parties intended. 

Earn-outs bridge valuation gaps, but require precision 

When buyer and seller have different views of a business’s value, an earn-out can bridge the gap by tying a portion of the consideration to future performance, but it can also defer the valuation question until after closing. 

Whether the earn-out is based on revenue, adjusted EBITDA or another metric, the SPA should clearly define how it will be calculated. These provisions may not be tested until one, two or three years after the transaction, when the parties determine whether earn-out requirements have been met. By that point, the business may have changed significantly under Buyer’s ownership, and without a clear roadmap for calculating the earn-out and addressing those changes, the parties may reach very different conclusions about whether the earn-out has been achieved. 

Prepare for a potential dispute before closing 

Not every post-close dispute can be prevented. But dispute experience can help identify risks before the SPA is signed. 

Two questions can help buyers and sellers evaluate SPA provisions: 

1. 1. Could this language reasonably produce an outcome materially different from what the parties intend?
   2. How would an independent neutral accountant, with no background on the transaction or the parties’ intent, interpret this language? 

The goal is not to approach a transaction expecting conflict, but to test whether the agreement says what the parties believe it says. 

Disputes can arise even when both parties act in good faith. An accounting policy change made for legitimate reasons after closing, for example, may unintentionally affect the purchase price calculation. 

The SPA should therefore be evaluated for how its provisions could operate after closing, not just what the parties intend today. 

Stress test the mechanics 

For working capital, review key balance sheet accounts and ask how the counterparty could calculate each one using the accounting principles established in the SPA. Focus on areas involving judgment or provisions with more than one reasonable interpretation. 

Apply the same approach to earn-outs: calculate revenue, adjusted EBITDA or applicable performance metric strictly according to the written language and determine whether the mechanism produces the expected result. A provision that appears clear in the drafting process can produce an unexpected result when applied to actual numbers. 

Once the SPA has been signed, the parties are bound by what they agreed to. Ambiguity identified before signing can be addressed. After closing, the parties may have far fewer options. 

Accounting and legal expertise should work together 

An SPA advisory team complements the buyer's or seller's legal counsel by focusing on the financial provisions that influence transaction economics, including pricing mechanisms, financial definitions, accounting principles and financial statement representations.  

Collaboration is particularly valuable because small changes in wording can have significant financial implications. 

Having an SPA team with dispute experience can also help identify risks before closing and assess a buyer’s or seller’s position if a disagreement occurs. 

Early involvement can preserve options 

Buyers and sellers should involve financial advisors when the first relevant SPA draft becomes available. Waiting until negotiations are advanced can make problematic provisions more difficult to revisit. 

The review should not be limited to isolated definitions. Advisors need the full SPA to understand how those definitions operate within the overall purchase price mechanism. 

Exhibits and disclosure schedules are often among the last components to be prepared and attached to the SPA. Careful attention should be given to these documents to ensure they are consistent with the provisions in the body of the Agreement and accurately reflect the agreed commercial intent and pricing mechanism.  

Protecting value throughout the transaction life cycle 

SPA advisory and dispute expertise can add value throughout the transaction life cycle, not only at signing or after a dispute arises. 

A proactive approach connects each stage: financial diligence identifies issues, SPA advisory translates them into the agreement, closing calculations apply its principles, and dispute expertise helps address disagreements that arise afterward. 

Protecting deal value requires looking beyond the headline purchase price to the definitions, accounting principles, and calculations that determine how much of that value is ultimately realized.