Advertorial: A comprehensive guide to price adjustment provisions in share purchase agreements (part 1)

November 13th, 2023

This is an advertorial and has been paid for by the client. 

The value of a company can change daily, and to complicate matters, there are many moveable parts regarding company valuations. Often, a reliable set of audited accounts is unavailable, and some things still need to happen before the purchaser can take transfer of the shares.

Considering the above, the questions which arise are: How will the purchase price be calculated, when will the purchaser become the owner of the shares, and from which date will the benefit in and to the shares as well the risk in and to the shares pass to the purchaser?

This article will focus on two methods often used in practice to address the above problem.

Method 1 – Closing Accounts: You agree that the purchase price must be based on the value of the company once the transaction is complete (in other words, once all the conditions precedent are dealt with and the parties meet to exchange closing documents).

Method 2 – Locked Box: You agree that the purchase price must be based on a past value of the target company – generally, the date of the last audited accounts (the ‘locked box date’).

Method 1 – Closing Accounts

Under the closing accounts mechanism, the purchase price is determined by reference to the target company’s financial position at completion. 

Completion generally happens a couple of days after all the conditions are dealt with. 


  • The price is adjusted to reflect the target company’s value at completion.
  • Suitable for situations where there is uncertainty about the target company’s financial condition at completion.


  • Preparation of closing accounts can be time-consuming and may require accountants’ involvement.
  • Differences in accounting interpretations or unforeseen adjustments can lead to disagreements.
Calculation of Final Purchase Price

Depending on the method used to value the target company, the final purchase price may be adjusted by taking into account:

  • Net debt/cash on closing.
  • Target working capital.
  • Target working capital + net debt/cash on closing.
  • Net Asset Value (NAV) on closing.
  • Profit on closing.

Let us look at different ways the final purchase price may be determined.

‘Debt-free’ and ‘cash-free’

Often, a purchaser will make an offer on a ‘debt-free and cash-free’ basis. An offer made on a ‘debt-free and cash-free’ basis means that the purchase price stipulated in the share purchase agreement (SPA) does not take into account any ‘debt’ or ‘cash’ in the business.

When the closing accounts are compiled, the ‘debt’ and the ‘cash’ as on the closing date will be calculated, and the purchase price will be adjusted accordingly.

Practical example:

Let us assume that Company A has offered to purchase all the shares in Company B for R 50 million on a ‘debt-free’ and ‘cash-free’ basis.

The initial understanding is that Company B will be delivered to the Company without any debt and cash. The final purchase price will then be adjusted based on Company B’s actual debt and cash as per the closing accounts.

Upon completion, the closing accounts reveal:

Debt in target Company B: R 10 million

Cash in target Company B: R 5 million

Final purchase price calculation: R 50 million (initial price) + R 10 million (debt) – R 5 million (cash) = R 55 million

Therefore, based on the closing accounts, Company A will pay R 55 million to acquire the shares in Company B. R 50 million would have been paid on the closing date, and the remaining R 5 million will generally be due and payable a couple of days after the closing accounts are finalised.

Working capital adjustment

Another common adjustment to the purchase price is based on the company’s working capital (current assets minus current liabilities). 

When buying the shares in a target Company, the purchaser expects the target company to have a certain level of working capital to sustain regular operations without additional investments immediately after the acquisition. The target working capital is agreed upon to ensure this. 

If the actual working capital on the closing date differs from this target, the purchase price is adjusted to reflect this difference.

Generally, a couple of days before the closing date, the seller will prepare a statement with an estimated working capital amount calculation based on the most recent financial information. The purchase price payable on the closing date will then be adjusted based on the estimated working capital amount.

Practical example:

Let us assume that Company A is purchasing all the shares in Company B. The initial purchase price agreed upon in the SPA is R 100 million, which includes an expectation that Company B will have a target working capital of R 20 million on the closing date.

A few days before the closing date, based on the most recent financial information, the seller calculates the estimated working capital amount as follows:

Current assets: R 25 million

Current liabilities: R 6 million

Estimated working capital amount: R 25 million – R 6 million = R 19 million

Given that the estimated working capital amount (R 19 million) is R 1 million less than the target working capital (R 20 million) stipulated in the SPA, an adjustment needs to be made.

This shortfall means that Company A, the purchaser, might have to invest an additional R 1 million to sustain Company B’s regular operations immediately after the acquisition. To compensate for this, the purchase price is reduced by the difference.

Original purchase price: R 100 million

Adjustment: R 100 million – R1 million = R 99 million (the ‘estimated purchase price’)

That is, however, not the end of the story. After the closing date, closing accounts will be prepared to determine the actual working capital amount on the closing date. If there is a difference between the estimated working capital amount and the actual working capital amount, an adjustment payment will need to be made.

Working capital adjustment on a ‘debt-free’ and ‘cash-free’

Often, you will find that an adjustment will have to be made for working capital and that the offer is made on a ‘debt-free” and ‘cash-free’ basis. In this case, the two methods contemplated above must be used together to calculate the final purchase price, and careful consideration must be given to the definitions of current assets, current liabilities, cash and debt.

Adjustment based on profit/NAV

Often, a target company’s valuation is based on profit or the NAV of the target company. If the parties want to adjust the purchase price based on the profit or NAV of the company, the parties will need to include a target profit/NAV in the SPA (similar to including a target working capital as above).

If the closing accounts reveal that the actual profit/NAV (based on the finalised closing accounts) is below the target profit/NAV, the purchase price must be adjusted.

Agreed principles

The SPA will generally provide that certain accounting standards (for example, the International Financial Reporting Standards) must be used to prepare the closing accounts. Relying on accounting standards alone to clarify the calculation is often not sufficient. For this reason, a schedule is added to the SPA, providing certain agreed principles for calculations. This schedule is prepared by accountants and attached to the SPA.

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This is an advertorial and has been paid for by the client. 

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