Purchase Price
The total consideration paid by the buyer to acquire the target business or its shares.
Full Definition
The purchase price is the total consideration paid by the buyer to the seller in exchange for the target business or its shares. It can comprise multiple components and may be subject to adjustment.
Components of purchase price:
- Initial cash consideration
- Deferred cash payments
- Earn-out payments (contingent)
- Vendor loan notes
- Share consideration (in buyer company)
- Assumption of liabilities
Price adjustment mechanisms: 1. Completion accounts: Price adjusted based on actual balance sheet at completion 2. Locked box: Price fixed, no adjustment (leakage protection instead) 3. Working capital adjustment: True-up to normalised working capital
Key pricing concepts:
- Enterprise Value basis: Cash-free, debt-free, normalised working capital
- Equity Value: What seller receives after debt/cash adjustments
- Headline price vs effective price: May differ significantly
Price negotiation factors:
- Valuation methodology and multiples
- Comparable transactions
- Quality of earnings
- Synergy potential
- Competitive tension in process
- Seller's alternatives
UK practice: UK transactions commonly use completion accounts or locked box mechanisms, with detailed provisions in the SPA governing price determination and dispute resolution.
Related Terms
Enterprise Value
The total value of a business including both equity and debt, representing the price to acquire the entire entity.
Equity Value
The value attributable to shareholders, calculated as Enterprise Value minus net debt and debt-like items.
Completion Accounts
Financial statements prepared at completion to calculate final adjustments to the purchase price.
Earn-out
Contingent payments to the seller based on the business achieving specified future performance targets.