Purchase price on sale of the company. How much and when will I actually get paid?

In addition to the valuation, the second key condition of the sale is the amount of the purchase price and its payment. The amount of the purchase price is a combination of the valuation of 100% of the shares in the company and the size of the share being sold.

Example: 100% share in the company was valued at 2mil. EUR. The purchase price for a 50% stake in the company is thus EUR 1m (Initial Purchase Price). However, the Initial Purchase Price is usually not the purchase price that the buyer will actually pay to the seller. Why?

In practice, the Initial Purchase Price is additionally increased or decreased in most transactions for the reasons set out below:

• Adjustment due to the time lag between signing and completion of the transaction – it is not uncommon for 1-6 months to elapse between signing and completion of the sale. During this period, the company is still managed by the seller, which can make the company’s financial situation better or worse. This is a risk that the buyer naturally wants to have treated. One of the two most commonly used mechanisms is to adjust the Initial Purchase Price by the amount of net debt and working capital as of the closing date.
  
  Example: if the amount of net debt on the date of completion of the transaction is higher than the amount assumed by the parties at the time of signing (e.g. by EUR 50 thousand) and at the same time the net working capital is also lower than the assumed one (e.g. by EUR 50 thousand), the Initial Purchase Price will be reduced by EUR 100 thousand (e.g. by EUR 50 thousand). EUR 100;

• Retention – a common practice is to keep part of the purchase price for an agreed period of time after the completion of the transaction (1-2 years) as a retention in an escrow account with a notary or bank.
  
  Example. EUR 100,000 remains in the escrow account for 12 months after the transaction is completed. The buyer claims compensation of 50k. EUR 50 due to the company’s obligation to pay the additional tax and penalties. The buyer will withdraw this amount from the escrow account and the remainder of the escrowed amount will subsequently be released from the escrow account to the seller;

• Earn-out mechanism (Additional purchase price) – the maturity of part of the purchase price is deferred and conditional on the future performance of the company. The buyer gives the seller an incentive to maximize the performance of the firm over a specified period (earn out period) and at the same time an obligation to share with the buyer the risk that this will not be the case.
  
  Example. If it increases by more than 15%, the amount of 250 thousand EUR will be paid to the seller. EUR. If in fact EBITDA increased by 17% during the earn-out period, the purchase price will increase by 250k. EUR.

As a result of the above adjustments, the final purchase price paid to the seller will be EUR 1.1 million (EUR 1 million – EUR 100 thousand – EUR 50 thousand + EUR 250 thousand).

Tomáš Demo also talked about how the purchase price is subject to adjustments in the show Ekonomika+ on TA3. And we will talk about it in even more detail with KPMG on our M&A Conference 13. .

If you are interested in this topic, please do not hesitate to contact us:

• Tomas Demo, e-mail: tomas.demo@highgate.sk

For more on M&A and private equity, please visit this section of our website: venture capital and M&A

If you are interested, you can also subscribe to our newsletter about interesting practical legal and tax information free of charge: Subscribe to newsletter.

Alternatively, you can address your specific questions in a consultation with our partner Tomáš Dem, who also specialises in this area. You can book a consultation here: