Adjustments on settlement

There may be many adjustments required on settlement relating to:

• • vendor’s liabilities, which the purchaser will be assuming, such as rent and employee entitlements; and
• • vendor’s assets, from which the purchaser will be benefiting, such as stock and work in progress.

Tax on adjustments

Where the purchaser will be paying a liability to which the vendor should contribute, there is an adjustment on settlement. In effect, the purchase price is reduced by the amount of that contribution.

The purchaser will receive a tax deduction for the whole of that liability, but will not be taxed on the benefit it receives by way of the allowance on settlement. In those circumstances, the vendor may seek to have the amount to be paid to the purchaser reduced to the after-tax amount of the purchaser’s liability.

Post settlement adjustments

Many adjustments cannot be calculated on settlement, as the amount of the relevant liability is not known at that time. This should be covered by clear contractual provisions, stating that any such adjustment should be made as soon as possible after it is able to be calculated.

Debts owed to the business

It is almost universal for contracts for sale of business to state that the debts of the business continue to belong to the vendor after settlement. In the period following settlement, as those debts are paid, the vendor may issue invoices to the same customers in respect of goods or services provided after settlement. This can raise the following issues:

• • If a debtor who owes money for both pre and post settlement invoices and makes a part payment, which invoices should this be applied to? The solution is for a contractual provision stating that any payments are applied to the oldest invoices first.
• • If both the vendor and the purchaser are chasing the same customers for payment, this can cause ill-will and confusion. This issue may be solved by a contractual provision stating that the purchaser is to collect all of the payments, and then account to the vendor for the vendor’s entitlements upon receipt.

See Adjustments on settlement.