Purchase Price Adjustments in Financial Services M&A Transactions

• Stephanie Evans
• 2.12.2025

I. Introduction

In most M&A deals involving private targets (including the sales of divisions of publicly traded companies), the purchase agreement will include a baseline dollar value for the target, with several adjustments. Often, the parties will agree upon the enterprise value of the company, and the purchase agreement will provide for both a deduction for the indebtedness and an addition for the cash on hand of the target as of the closing. The agreement will also incorporate an adjustment upward or downward to the extent that the target’s net working capital (i.e., current assets minus current liabilities) as of the closing is more or less than an agreed-upon, normalized level of working capital. The agreement will also typically include a deduction for the transaction-related expenses incurred by the target company, since these would commonly be borne by the seller rather than the buyer. The definitions of “indebtedness,” “cash,” “working capital” and “transaction expenses” are often heavily negotiated. For example, “indebtedness” often includes not only borrowed money, but also debt-like items such as bonus accruals, earnout obligations and deferred revenue, and “transaction expenses” often include payments to employees in connection with the transaction (including associated payroll taxes) and may include other shared costs, such as the costs of obtaining representations and warranties insurance or D&O tail insurance, or governmental filing or other third-party consent fees.

While M&A deals involving financial services companies (such as banks, specialty lenders, asset managers or insurance companies) may employ some or all of these common adjustments, the unique nature of the companies involved—and the fact that they are valued differently from technology, life sciences, manufacturing and other companies—often leads to industry-specific adjustments being included in the purchase agreement. This article provides a high-level overview of some of the more common adjustments utilized in these types of transactions and certain key considerations for each.

II. Types of Purchase Price Adjustments in Financial Services Deals

a. Banks and Specialty Lenders—Book Value Adjustments

Banks and specialty finance companies have a substantially different profile from other companies. The asset side of their balance sheet is primarily made up of loans or similar financing arrangements, such as leases. Their lending activities are funded by substantial amounts of leverage—in the case of banks, this includes deposits, Federal Reserve or Federal Home Loan Bank borrowings, or other debt, and in the case of specialty lenders, this includes credit facilities, warehouse lines, and other debt arrangements secured by the loans and other assets—which often remain in place following the transaction (even if lender consent is required). Accordingly, these transactions are often priced based on a premium to book value (as opposed to enterprise value), with the purchase price expressed as either (i) a base purchase price, with an adjustment at closing to the extent that the book value as of closing is more or less than the historical book value used to set the base purchase price, or (ii) the book value of the company as of a certain date (which may be the closing or an earlier date) plus the agreed-upon premium.

While this structure sounds simple, there are several decision points for the parties, including (among others) the following: 

• What is the measurement date for the book value? While the parties may agree that the book value will be measured as of the closing date, in which case the seller essentially receives the economics of the business from signing to closing, they may also utilize an earlier date following which the profits (or losses) would accrue to the buyer. In this latter instance, the purchase agreement would include various “lockbox” provisions that apply subsequent to the measurement date, to prevent the seller from taking distributions or receiving other payments from the target company that would reduce the value of the business for the buyer (i.e., leakage).
• What are the agreed-upon accounting principles used to determine book value? The parties will often start with GAAP but will negotiate one or more deviations that will be documented in the purchase agreement.
• Is there any indebtedness that should be treated separately from the balance sheet adjustment? While the indebtedness of the business is functionally deducted from the purchase price by its inclusion on the balance sheet, there may be some indebtedness that is not tied to the assets of the business—such as shareholder loans, unsecured parent-level debt or other subordinated indebtedness—that will be paid off at closing and accordingly would not be included on the balance sheet used to determine the purchase price, but rather would be treated as a separate line-item deduction to the purchase price otherwise payable to the seller.

Lockbox Provisions

Under a lockbox provision, the purchase price will be determined using a pre-closing (and in most cases, pre-signing) balance sheet and will not be trued up as of closing. The buyer will therefore need to protect against fluctuations in the value of the business that are unrelated to its inherent performance. Accordingly, the parties will agree to treat certain seller transactions after the measurement date as “leakage,” meaning any value extracted should be deducted dollar-for-dollar from the purchase price. Common examples of leakage include dividends, distributions and other returns of capital to the seller, intra-group payments outside the ordinary course, waivers of rights or claims against seller-affiliated parties and certain transaction costs or bonuses paid to seller personnel. Alternatively, ordinary course and other transactions may be deemed “permitted leakage” by the parties, meaning such transactions will not cause a purchase price deduction. Common examples of permitted leakage include pre-agreed costs, compensation of personnel (including owners) in the ordinary course and permitted intraparty trading arrangements. Given that a lockbox arrangement results in the buyer capturing any appreciation in the value of the business after the measurement date, a seller may seek to include an interest component to the purchase price that would increase the payments to the seller either for the full duration of the period between the measurement date and closing or only after a specified target closing date.

b. Wealth and Other Asset Management Transactions—Client and Advisor Retention Adjustments

In wealth and other asset management transactions, the clients and advisors with such client relationships are key to the value of the business, and the purchase agreement will often include purchase price adjustments and other economic provisions tied to client or advisor retention, with any amount of attrition reducing the maximum amounts payable to the seller. 

Before implementing client or advisor retention adjustments, the parties should consider certain key decision points, including (among others) the following:

• Over what period is the adjustment applied? The parties may determine to measure retention based on the clients or advisors who are retained as of closing and/or at some time following the closing. Regardless, the seller must understand the advisor compensation arrangements that the buyer will put in place for it to properly gauge the likelihood of receiving the maximum value in respect of the adjustment. This is of course directly related to advisor retention but could also be indirectly related to client retention given that the departure of the advisors holding the client relationships could lead to the loss of the client.
• Will there be limitations on the adjustments applied? Often the parties will include thresholds for the adjustment so that no adjustment applies to the extent that client or advisor attrition is less than an agreed-upon amount. In addition, the size of the adjustment will often be capped—; this can be effected by either (i) a maximum downward adjustment applied at closing or, (ii) where the adjustment applies to post-closing attrition, a specific escrow or holdback amount tied to the adjustment that is ultimately paid based on the level of attrition. In some cases, there may be both a closing condition and a purchase price adjustment tied to attrition levels, such that the buyer (or in some cases the seller) does not have to close if the attrition exceeds the maximum size of the adjustment.
• What is the universe of clients or advisors covered? There may be certain divisions or categories of the target’s clients that are more or less integral to the economics of the business, and therefore only certain categories of clients or advisors will be covered by the adjustment. In addition, the seller may ask for any negative adjustment to be mitigated by new clients or new hires during the applicable period. 
• What is the metric used to determine the adjustment? While there are various metrics to choose from, common ones include assets under management, revenue run rate and (for advisor retention adjustments) historical commissions associated with each particular advisor. Once the applicable metric is selected, the parties will then negotiate the associated definitions, including any exceptions to the way the target commonly accounts for these items.
• How will the necessary consents be obtained? While client contracts often contain an assignment or change-in-control clause requiring the client’s consent if the seller is sold, some contracts permit negative or implied consent, meaning an affirmative response is not required and consent will be deemed to have been obtained after a client has received notice about the transaction and has not objected after a certain time period has passed. Where the assets under management include SEC-registered funds, the consent process may require a proxy solicitation under SEC rules, which is substantially more labor-intensive and time-consuming.

III. Conclusion

The foregoing are just some high-level examples of the purchase price adjustments employed in financial services deals and some of the key considerations for each. Oftentimes, the negotiations can be quite complex, and one or more features of several of these mechanisms are combined. Regardless of the adjustment implemented, it is imperative that the parties to the transaction work in close coordination with their counsel and their financial and accounting advisors, at an early stage, to craft the optimal adjustment mechanics for the particular transaction and consider the possible future events that will need to be accounted for.