What is Post-Closing True-Up?
The Short Answer
Post-Closing True-Up explained simply
A Post-Closing True-Up is a process where the final purchase price of a business is adjusted after the sale has officially closed. This adjustment happens because some financial figures, like working capital, are often estimated at the time of closing. Once the actual, audited figures are available, usually a few weeks or months later, the true-up process compares these actuals to the estimates. If there’s a difference, either the buyer pays more to the seller, or the seller refunds money to the buyer, to make sure the final price reflects the business’s true financial position at closing.
Real-World Example
The Widget Company Sale
Imagine a widget company is sold for $1 million. At closing, the working capital is estimated to be $100,000. The purchase agreement states that if the actual working capital is higher or lower, the price will be adjusted.
Two months later, the final audit shows the actual working capital was $110,000. Since the actual amount is $10,000 higher than the estimate, the buyer would pay the seller an additional $10,000. If the actual working capital was $90,000, the seller would refund $10,000 to the buyer.
Why this matters
This matters because it ensures fairness for both the buyer and the seller. It prevents either party from being overpaid or underpaid due to estimates made at closing. It also protects the buyer from inheriting unexpected liabilities or the seller from not getting full value for their assets.
Always clearly define the true-up mechanism and the financial metrics it will apply to in the purchase agreement. This prevents disputes later on.
Always clearly define the true-up mechanism and the financial metrics it will apply to in the purchase agreement. This prevents disputes later on.
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