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Closing Accounts Earn Outs Closed Box Notes

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M&A Workshop 4

Prep Task:

1. Adjusting the Purchase Price (PP) What Matters is what the Parties have agreed. This might not be as straight forward as there may be saying "we will sue you if" and therefore, it sounds like a threat.

1.Representations and warranties made by the seller: the purpose of this to:
 encourage disclosure by the seller;
 allow the buyer to walk away if any are discovered to be untrue to a material extent before closing (subject to negotiation); and
 provide retrospective price adjustment if any are found to be untrue after closing, through claims for breach of warranty by the buyer.

2.Closing accounts: Do not make PP fixed, instead make it subject to adjustment by reference to closing accounts (which includes, a full profit and loss account ad balance sheet or, a valuation of assets such as stock or, a determination base on financial matters such as the level of cash and debt.

3. Earn-outs: Make PP dependant on earn-outs (earn outs are security against breaches of warranty or adjustments to the PP based on the deferral of the PP by reference to future performance of the target Co.

4. Negotiate the Purchase Price and "Lock-Box" it(i.e. fix it beforehand) Most commonly used in Share Acquisitions. It is attractive for the sellers but riskier for the buyer as there will not be a chance for adjustment after completion (except by using a warranty claim).

2. Adjusting the Payment
- Deferred Consideration: The buyer could ask the Seller to agree to receive a deferred consideration. This is in line with a potential PP adjustment as a result of an agreed Earn-Out. Similarly, due to the potential IP Rights claim the Buyer will be in a good position to ask for retention of part of the purchase price as security in case the IP Rights claim arises.

3.Points to clarify with client + identify further instructions to amend the price and payment provisions in the SPA.
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This is an Acquisition in Brazil, contact local counsel. The position regarding the Earn-Out will depend on whether the sellers will manage the Co. after completion + if so, for how long +
timetable to review the accounts The accounts of the seller The IP Rights claim

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