Purchase Price Adjustments Gone Wrong

Introduction

An acquisition agreement's purchase price adjustment  – where lawyers pretend to be accountants and accountants pretend to be lawyers  – is a potential minefield of unpleasant surprises. Readers of Sponsor Sync will be familiar with a certain dispute involving a West Coast-based grocery store chain.¹ In this article, we turn our attention to another cautionary tale, this time involving a Bitcoin mining operator.²

Adjustments Gone Wrong

The relevant dispute in Northern Data turned on whether $22,490,956 of payments the target received should have been recognized as deferred revenue as of closing. Sellers did not recognize the disputed payments as such, and they received closing consideration of $52,812,202 for the target. Following the closing, buyer took the opposite view, recognizing the full amount as deferred revenue, which increased closing indebtedness by $22,490,956, decreasing deal consideration accordingly. The parties submitted the dispute to an accounting expert.

The acquisition agreement required the accounting expert to resolve this issue “in accordance with GAAP, in a manner in accordance and consistent with the [company's historical practices reflected in an] Illustrative Closing Statement and pursuant to the terms of the [SPA]”. The accounting expert found in buyer's favor, and sellers initiated the Northern Data litigation to vacate the expert's determination. Sellers argued that the expert considered GAAP, ignoring the target's historical practices for recording revenue as reflected in the Illustrative Closing Statement. In ruling in favor of buyer, the court found that the foregoing language creates a hierarchy: the accounting expert's determination must first be in accordance with GAAP, but if GAAP allows for multiple approaches, then they must choose the one consistent with the Illustrative Closing Statement. The court held that GAAP required the payments to be recorded as deferred revenue, resulting in a ~40% decrease in the consideration payable to the sellers.

Best Practices

This case, and others like it, illustrate some key practice points to help avoid a purchase price adjustment dispute:

• Process, process and process again. Work closely with accountants and financial advisors at all times throughout purchase agreement negotiation and drafting. Align in advance on process timeline, especially in fast-moving transactions, to permit advisors time to review drafts of the relevant provisions.
• A detailed model of the EV-to-equity bridge is key. Some definitional components of a purchase price calculation may leave room for interpretation³ – a detailed model forces deal teams and financial advisors to wrestle with the language in the contract leading to a better process.
• If the parties differ in level of sophistication, consider including a detailed sample calculation marrying each line item to its purchase price definition as an exhibit to the purchase agreement. But be clear about whether the exhibit is binding or included for illustrative purposes only.⁴
• Attend to how accounting metrics used to calculate and adjust final purchase price are defined. Do not let a representation about the target's historical accounting excuse you from doing your diligence.⁵ The remedy for a breach of reps may not sufficiently cover the difference in purchase price resulting from a misunderstanding.
• Finally, consider a cap on any post-closing purchase price adjustments, especially in transactions where multiple interpretations of an accounting concept could materially impact purchase price. Based on our proprietary DealVision360 database, the number of deals that use such caps is significant (39.6% of tracked deals), offering both sides certainty that their respective exposure will be capped.

We hope that by following our recommendations, and those in prior Sponsor Sync articles, deal parties can establish a robust process that minimizes surprises and allows parties to achieve the economic outcomes they bargained for.

Footnotes

1. See West, G. Post-Closing Purchase Price Adjustments Gone Wrong: The Save Mart/ Kingswood Capital Dispute, Summer 2024 Weil Private Equity Sponsor Sync 20, https://www.weil.com/-/media/ mailings/2024/q3/weil-private-equity--- sponsor-sync---summer-2024.pdf

2. Northern Data AG v. Riot Platforms, Inc., C.A. No. 2023‑0650‑LWW (Del. Ch. June 2, 2025).

3. US, Inc. v. Enavate SMB, LLC, 2024 WL 5274569 (Del. Sup. 2024).

4. Id.

5. Chicago Bridge & Iron Co. v. Westinghouse Electric Co., 166 A.3d 912 (Del. 2017).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.