Closing Balance Agreement

Seller: It`s a whole dollar for the seller. And to the extent that the seller may have been too diligent to leave additional working capital in the business or when the closing time leads to an artificial fall in working capital, the seller could actually find that he is disadvantaged by the final adjustment if it is not properly constructed. The seller must also provide an appropriate overview of the buyer`s count after closing and have an appropriate procedure to challenge the calculation. Overall, closing adjustments relate to any number of potential adjustments to the purchase price in a transaction. These adjustments are most often made in the form of working capital adjustments; adjustments based on closing funds, debt and transaction expenses; Receivables and/or stock adjustments. In most cases, the purchase price is adjusted upwards or downwards depending on the amount of any of these balances that may differ from a pre-negotiated target balance at closing. While there are several techniques that can be used to minimize differences of opinion in calculating working capital between the buyer and seller in AM, it is important to understand that the causes are generally not infamous misrepresentations of the financial institution, opportunistic calculations of purchase prices or incorrect application of overly complex accounting guidelines. On the contrary, these differences can most often be attributed to the succession of events that result from the final balance sheet and those that followed the closing of the true-up. Thus, in Brim Holding Company, Inc. v. Province Healthcare Company6, the Tennessee Court of Appeal imposed the explicit terms of a sales contract, which led to a seemingly involuntary double recovery for one of the parties. In that case, it was a sales contract under which Brim Holding Company, Inc. (“Brim”) acquired Brim Healthcare, Inc.

(“Healthcare”) from the Province Healthcare Company (“province”). Under the agreement, the province agreed to exempt Brim from losses related to certain litigations. Brim paid $50,000 to settle the dispute and then asked the province for compensation. However, the province denied the application on the grounds that Brim had already recovered the payment through a working capital adjustment. In particular, Province stated that the final balance sheet already contained a reserve of $US 50,000 for the litigation, which reduced the labour capital (and the amount paid by Brim at closing) by $US 50,000. As such, Province asserted that the requirement to compensate Brim for the $50,000 colony would result in a double recovery for Brim. While this argument had some logical force, the Court found in Brim`s summary decision that “the parties anticipated the loss in question and made explicit and unequivocal arrangements for the damage to be paid by [the province].” 7 Therefore, the Court rejected the “cancellation” of the compensation provision, based on the province`s assertion that the requirement for such a payment was abusive for the adjustment of working capital and inconsistent with the intentions of the parties.8

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