The execution of an outright purchase agreement is not a single event, but a multi-phased process that starts long before signatures go on paper and can run long after funds are wired. Each phase brings its own risk set that must be managed through planning, investigation and negotiation.

In sophisticated M&A, the purchase price is rarely a fixed, static number. Instead it is often a formula that is only finally calculated after closing. The price paid on the closing date is based on an estimate; the real price emerges weeks or months later as the parties complete a “true-up”.

Practically, this means the buyer is acquiring a living, operating business whose value fluctuates daily. The adjustment mechanism is designed so that at the moment of transfer, the buyer receives the economic engine they bargained for, not a business that has been quietly drained of working capital or loaded with short-term liabilities.

As a result, the negotiation of the adjustment methodology—precise definitions of Net Working Capital, agreed accounting principles and cut-off rules—is often at least as important as negotiating the headline purchase price.

The critical role of comprehensive due diligence

Phase 1 is arguably the most important for risk mitigation. The work done here shapes the entire transaction and directly feeds into the terms of the final agreement.

Due diligence is the buyer’s comprehensive investigation into the legal, financial and operational status of the target asset or business. It is a systematic process designed to:

• Verify that the seller’s statements about the business are accurate; and
• Uncover hidden risks, liabilities or defects that could affect value or future operations.

This is not a box-ticking formality. It is a strategic tool whose findings directly drive how the purchase agreement is drafted and negotiated.

Typical diligence streams include:

• Legal diligence. Reviewing corporate records, material contracts, permits and licences, IP registrations, and any pending or threatened litigation.
• Financial diligence. Analysing historical financial statements, tax returns, aged receivables and inventory valuation to understand profitability, cash-flow and quality of earnings.
• Operational diligence. Inspecting physical assets, mapping supply chains and key customers, and assessing employees and core processes.

In practice, due diligence and contract drafting are intertwined, not sequential. A diligence finding almost always becomes a contractual protection.

• If diligence uncovers a potential environmental issue, it does not simply sit in a report; it triggers a tailored environmental representation and a specific indemnity in the purchase agreement.
• If a seller pushes back hard on a standard representation or warranty (for example, refusing to warrant the condition of key equipment), that resistance itself is a red flag, signalling the buyer to dig deeper in that area.

This creates an iterative loop: Diligence → Contract Negotiation → Extra Diligence → Final Contract. The signed agreement is the codified result of that loop.

From LOI to definitive agreement

The process usually begins with a Letter of Intent (LOI) or term sheet. This is often non-binding but captures the high-level business terms:

• Indicative purchase price or pricing formula;
• Basic deal structure (asset vs stock purchase, or hybrid); and
• Key conditions, timing and any exclusivity arrangements.

The LOI confirms that the parties are aligned on the big picture before they commit serious time and cost to full diligence and drafting. Once it is signed, the buyer’s and seller’s advisors begin the heavy work of negotiating the definitive purchase agreement.

This is where the diligence findings are translated into binding contract language, and where risk-allocation mechanisms—representations and warranties, indemnification, conditions precedent—are hammered out line by line.

Satisfying contingencies & conditions

The period between signing and closing is a critical interim phase. The deal exists on paper, but the transfer has not yet happened. Both sides must now work to satisfy the conditions precedent in the agreement.

For the buyer, typical tasks include:

• Securing financing on acceptable terms;
• Completing any remaining physical inspections and environmental assessments; and
• Obtaining a satisfactory title report and resolving any defects.

For the seller, common tasks include:

• Obtaining third-party consents to assign key contracts, many of which contain anti-assignment clauses;
• Securing landlord consent to transfer leases; and
• Updating or transferring required licences and permits.

If either party fails to satisfy its conditions within the agreed time, the other party may have a contractual right to terminate the agreement.

The closing process

Closing is the formal event when the transaction is completed. In practice it may be a physical meeting or a virtual closing handled via email and electronic signatures.

At closing, several things happen in a tightly coordinated sequence:

• The parties execute and deliver the final legal documents—such as the deed, bill of sale and assignment and assumption agreements.
• The buyer transfers the purchase funds (usually to an escrow agent or directly to the seller’s account, depending on the structure).
• The seller formally transfers legal title and physical possession of the asset or business.

Once these steps are completed, the sale is considered closed and ownership has officially changed hands.

Purchase price adjustments in practice

Despite the label “outright purchase”, the relationship between buyer and seller usually continues after closing. One major reason is the post-closing purchase price adjustment.

In most private-company deals, the price paid at closing is provisional. The agreement will set out a mechanism to adjust the final price so that it reflects the agreed economic position at the closing date.

Working Capital Adjustment. The most common mechanism is a Net Working Capital (NWC) adjustment:

• The parties agree a target NWC that the business is expected to have at closing (current assets minus current liabilities).
• After closing, the actual NWC is calculated as of the closing date. If actual NWC is below the target, the seller must pay the shortfall to the buyer.
• If actual NWC is above the target, the buyer pays the excess to the seller.

This protects the buyer against a seller who might otherwise “strip out” working capital before closing (for example by aggressively collecting receivables or delaying payables) and ensures the business is handed over with the level of working capital both sides assumed.

The adjustment process step-by-step

The adjustment mechanism typically follows a standard pattern:

• Within an agreed period after closing (often 60–90 days), the buyer prepares and delivers its calculation of closing NWC to the seller.
• The seller then has a defined window (for example, 30 days) to review the buyer’s calculation and submit any written objections.
• If the parties cannot resolve differences through negotiation, the dispute is referred to a neutral independent accounting firm, whose determination is usually final and binding.

Post-closing indemnification claims

If, after closing, the buyer discovers that a representation or warranty was breached—for example, an undisclosed liability surfaces or a warranted financial statement proves inaccurate—the buyer may bring an indemnification claim against the seller.

The process for raising and resolving such claims is governed by the indemnity provisions of the purchase agreement, including:

• Survival periods that limit how long claims can be made;
• Baskets (or deductibles) that require losses to exceed a minimum threshold; and
• Caps that set an upper limit on the seller’s total indemnification exposure.

Key transactional risks

Across all phases, several recurring risk themes appear:

• Valuation gaps. Buyer and seller may fundamentally disagree on value, often because they use different assumptions or projections about future performance.
• Undisclosed liabilities. Especially in stock purchases, the buyer can inherit historical liabilities that were not discovered in diligence, such as past tax deficiencies, environmental contamination or product liability claims.
• Operational & supply chain risks. After acquisition, the business can be hit by the failure of a key supplier, raw material price spikes or quality problems that erode profitability.

Strategic tools to manage these risks

Modern purchase agreements deploy several structural tools to bridge buyer–seller gaps and manage residual risk:

• Escrow and holdbacks. A portion of the purchase price is placed in escrow with a neutral third party or held back by the buyer for a defined period. These funds form a ready pot to satisfy successful indemnity claims or downward price adjustments, adding a layer of security beyond a simple promise to pay later.
• Representations & Warranties Insurance (RWI). RWI policies cover losses resulting from breaches of the seller’s representations and warranties. They are increasingly common in M&A:
  • For sellers, they enable a cleaner exit by reducing or even eliminating post-closing indemnity exposure.
  • For buyers, they provide a creditworthy counterparty (the insurer) for claims, instead of relying solely on the former owners’ balance sheet.
• Earn-outs. An earn-out makes part of the purchase price contingent on the business hitting agreed performance milestones (for example, revenue or EBITDA targets) after closing. This:
  • Aligns interests—sellers are motivated to support a smooth transition and continued success; and
  • Protects buyers from overpaying if the business underperforms against optimistic forecasts.