How do purchase price adjustment mechanisms work in an Ontario business deal?

Most Ontario business purchase agreements include purchase price adjustment mechanisms to ensure the buyer pays for the business's actual value at closing, not just its estimated value at signing. The most common is a working capital adjustment.

Working capital — typically current assets minus current liabilities — fluctuates as the business operates. A target working capital level is set in the purchase agreement. At closing (or shortly after), the actual working capital is measured, and the purchase price is adjusted up or down to reflect any difference from the target. This prevents the seller from draining cash or letting payables build up between signing and closing.

The adjustment process usually involves: a closing date working capital estimate, followed by a post-closing true-up after full accounting records are available. The purchase agreement specifies the accounting methodology, the timeline, and a dispute resolution process (often involving a neutral accounting firm) if the parties disagree on the calculation.

Earn-out provisions are another form of price adjustment, but they depend on post-closing performance rather than a snapshot of the business at closing.

Understanding these mechanisms is important for both buyers and sellers — a working capital adjustment can move the effective purchase price by a meaningful amount in either direction.