Meaning
The final reconciliation of financial statements after a transaction ensures that the purchase price matches actual assets at the handover date. Through post-closing adjustments, the buyer and seller correct for changes in cash and inventory. This reconciliation occurs after the close of the transaction because a business continues to trade until the final minute.
Reconciliation Process
A detailed audit of the balance sheet as of the closing date is prepared within a specified number of days. This audit forms the basis for post-closing adjustments, which determine whether additional funds are owed. The process is governed by rules set out in the purchase agreement to prevent disputes.
Discrepancy Settlement
Differences between the estimated figures used at signing and the actual figures at closing are calculated. If the business has more cash or less debt than estimated, post-closing adjustments require the buyer to pay the difference to the seller. In cases where the assets are lower than expected, the seller must reimburse the buyer or forfeit money from an escrow account.
This settlement ensures that neither party gains an advantage from the timing of the transition.
Dispute Risk
Disagreements over accounting methods during the reconciliation can lead to lengthy arguments. To minimize the risk of post-closing adjustments leading to litigation, agreements usually specify an independent accountant to resolve deadlocks. This pre-arranged pathway avoids court battles and provides a final, binding answer.
