Valuation and Price Adjustment in M&A: The Legal Mechanisms Every Founder Needs to Understand

In most mid-market M&A transactions in Brazil, the price stated in the LOI (Letter of Intent) is not the amount the founder actually receives in the bank — because enterprise value and equity value are different concepts, and net debt and working capital adjustments are calculated at closing, not during the initial negotiation.

TL;DR – Enterprise value (EV) is the value of the business; equity value is what the seller actually receives. The difference is net debt. – The working capital target defines the “normal” level of working capital. If the deal closes with working capital below the target, the seller pays the difference. – A locked-box mechanism fixes the price at a reference date and shifts the risk to the buyer before closing — but it requires strict anti-leakage clauses. – Completion accounts calculate the final price based on the actual figures at closing — more work and more potential for disputes, but it’s the most common mechanism in mid-market transactions in Brazil. – An earn-out ties part of the price to future performance — useful for bridging a valuation gap, but it requires precisely defined metrics and protection for the seller against buyer interference.

Updated on 06/18/2026. Price adjustment mechanisms in M&A are defined by contract — there is no specific Brazilian statute regulating completion accounts or locked-box structures. Market practice evolves, and due diligence customs vary depending on the buyer’s profile and industry.

Table of Contents

1. The Closing That Surprised the Founder
2. Enterprise Value vs. Equity Value: The Difference That Defines What You Receive
3. Net Debt and Working Capital: Why They Factor Into the Adjustment
4. Locked-Box vs. Completion Accounts: Two Mechanisms, Two Risk Profiles
5. Earn-Out: When the Price Depends on the Future
6. What to Negotiate in the LOI to Reduce Price Uncertainty
7. Frequently Asked Questions

The Closing That Surprised the Founder

The founder of a B2B software company signs a Letter of Intent (LOI) for R$25 million. The negotiation was long — six months of discussions, due diligence, and back-and-forth over EBITDA multiples. The final figure, R$25 million, is what the founder communicated to the minority shareholders as the deal’s price.

At closing, the buyer presents the price adjustment calculation: a negative working capital adjustment of R$3.2 million (the business’s working capital on the closing date was below the target set in the LOI) and a net debt adjustment of R$1.8 million (loans the founder wasn’t tracking because they were held in the name of a subsidiary). Final price: R$20 million.

The founder didn’t understand what had actually been negotiated. The LOI set an enterprise value of R$25 million on a “cash and debt free, normalized working capital” basis — standard M&A language meaning the price assumes the business has no debt, zero net cash, and operates with a normal level of working capital. If reality differs, the price adjusts accordingly.

The adjustment wasn’t a surprise to the buyer — it was anticipated in the LOI and detailed in the SPA (Share Purchase Agreement). The surprise belonged to the founder, who hadn’t fully understood what he had signed.

Enterprise Value vs. Equity Value: The Difference That Defines What You Receive

Enterprise value (EV) is the total value of the business — what a buyer would pay to acquire 100% of the company, assuming it carries no debt and holds zero net cash. It’s the value of the operation itself, regardless of how it’s financed.

Equity value is what the shareholders actually receive. It’s calculated from enterprise value, adjusted for the company’s capital structure:

Equity Value = Enterprise Value − Net Debt ± Working Capital Adjustment

The difference between the two concepts is net debt: bank loans, debentures, finance leases, and other financial debt, net of cash and cash equivalents.

Numerical example:

The biggest trap for founders selling for the first time: enterprise value is the number that makes the deal headline — but equity value is what actually lands in the bank account.

Net Debt and Working Capital: Why They Factor Into the Adjustment

Net Debt

Most M&A transactions are structured on a cash and debt free basis: the seller delivers the company with no financial debt and no excess cash. If the company carries debt, the price goes down. If it holds cash above what’s needed to operate, the price goes up.

What counts toward net debt is negotiated in the SPA and may include: – Bank loans and financing – Debentures – Finance lease agreements (particularly relevant following the adoption of IFRS 16 / CPC 06 R2 in Brazil) – Debts owed to related parties (shareholders, group companies) – Post-employment benefit obligations – Contingent liabilities the seller has guaranteed

What’s excluded: normal operating liabilities (accounts payable to suppliers, wages payable), which fall under working capital instead.

A common trap: subsidiary and SPE (“sociedade de propósito específico” — a special-purpose entity commonly used in Brazil to ring-fence a specific project or asset) debts that the founder failed to map during the negotiation. The buyer’s due diligence will find them; the closing adjustment will charge for them.

Working Capital

The working capital target defines the “normal” level of working capital needed for the business to keep operating continuously after the transaction. It’s calculated as:

Working Capital = Operating Current Assets − Operating Current Liabilities

The target is typically calculated as the historical average over the past 12 to 24 months. If working capital on the closing date falls below the target, the seller pays the difference (since the buyer would otherwise receive a business with less working capital than it needs). If it’s above target, the buyer pays the difference to the seller.

Why working capital becomes a source of conflict: the definition of what counts and what doesn’t (cash? recoverable taxes? advance payments?) is subject to negotiation and, frequently, dispute during the closing calculation. Defining the calculation mechanism in the LOI — rather than leaving it for the SPA — reduces the room for conflict.

Locked-Box vs. Completion Accounts: Two Mechanisms, Two Risk Profiles

There are two main mechanisms for calculating the final price in M&A. The choice between them determines who bears the risk of the period between signing and closing.

Locked-Box

How it works: the price is fixed based on the balance sheet of a past reference date (the “locked-box date”), usually audited. From that point on, the buyer assumes economic ownership of the business — any profit generated between the locked-box date and closing belongs to the buyer; any loss does too.

Who bears the risk: the buyer, from the locked-box date onward.

Protection for the buyer: anti-leakage clauses prohibit the seller from extracting value from the company between the locked-box date and closing — no dividends, no above-normal payments to related parties, no granting of guarantees. Any “leakage” must be repaid to the buyer, often doubled (or at the penalty percentage negotiated).

Advantages: price certainty at signing, no dispute over figures at closing, a simpler process overall.

Risks for the seller: if the business performs very well between the locked-box date and closing, the seller doesn’t capture that upside. The locked-box date needs to be recent enough that it doesn’t reflect a reality too far removed from the closing.

Completion Accounts

How it works: the price is calculated based on the company’s actual figures at the closing date. The SPA sets an estimated price, paid at closing, followed by a subsequent adjustment based on the closing financial statements (the completion accounts).

Who bears the risk: the seller, until closing — since they continue operating the business on their own account throughout the period between signing and closing.

Process: after closing, the parties have a set period (typically 45 to 90 days) to prepare and review the completion accounts. If there’s disagreement, the SPA sets out the resolution mechanism — usually an independent expert or accounting arbitrator.

Advantages: the price reflects the reality at closing; the seller captures positive performance during the period.

Risks: more complexity in the calculation, more room for disputes, the cost of specialized accountants, and a resolution timeline that can stretch on for months after closing.

Which is more common in Brazil: completion accounts predominate in mid-market transactions in the Brazilian market, especially when the buyer is a private equity fund or a foreign company accustomed to this model. Locked-box appears more frequently in transactions between domestic companies or when the seller has enough bargaining power to demand price certainty.

Earn-Out: When the Price Depends on the Future

An earn-out ties part of the M&A price to the company’s future performance after closing — usually over a 1- to 3-year period. The seller receives the base price at closing and the earn-out only if the targets are met.

When it comes up: when the buyer and seller have different views on the business’s future value. Instead of reaching an impasse, the earn-out splits the risk: the buyer pays less if the business underperforms; the seller captures the upside if the projections hold true.

What the contract needs to define precisely:

1. Earn-out metric. EBITDA? Net revenue? Number of customers? The definition needs to be objective, auditable, and immune to conflicting interpretations. “Adjusted” EBITDA is the most contested metric — adjusted for what? Who defines the adjustments? The SPA needs to answer this.
2. Measurement period. Months? Years? Measured per period or on a cumulative basis? Annual earn-outs with a catch-up mechanism (compensating for below-target periods in subsequent years) are more favorable to the seller.
3. Protection against buyer interference. If the buyer decides to change the sales strategy, cut the marketing budget, or integrate the acquired company in a way that reduces reported EBITDA, the earn-out can drop to zero without the seller having done anything wrong. The SPA should provide for: operational autonomy of the business during the earn-out period, restrictions on buyer changes that materially affect the metric, and the seller’s right to information regarding the financial statements used as the basis for calculation.
4. Dispute resolution mechanism. Who certifies the figures? Who resolves disagreements? An independent accounting arbitrator is the most efficient standard — an arbitral tribunal takes longer and costs more for a dispute that is essentially accounting in nature.

The earn-out is useful for closing deals, but it tends to be the source of the biggest post-closing disputes in mid-market M&A. The clearer the metric definition in the SPA, the lower the risk of conflict — and the seller should assume that any ambiguity will be interpreted by the buyer in its own favor.

What to Negotiate in the LOI to Reduce Price Uncertainty

The LOI is the moment when the seller still has bargaining power. Whatever is left undefined in the LOI becomes a point of dispute in the SPA — and in the SPA, the buyer generally has more resources to sustain that negotiation.

What the LOI should define:

1. Price on what basis? Specifying “enterprise value of R$X on a cash and debt free, normalized working capital basis” eliminates ambiguity about what the number actually means.
2. Definition of net debt. List what’s included — at least the main categories. Does an IFRS 16 lease count or not? Related-party debts? Provisioned contingencies?
3. Working capital adjustment mechanism. Locked-box or completion accounts? If locked-box, what’s the reference date? If completion accounts, what’s the delivery deadline and who resolves disputes?
4. Working capital target. Fix the calculation methodology (historical average over how many months?) and the reference period. Don’t leave it “to be defined in the SPA” — the buyer will define the methodology in its own favor.
5. Earn-out: general parameters. If there’s an earn-out, the LOI should set the maximum amount, the main metric, and the period. The details go into the SPA, but fixing the parameters in the LOI reduces later negotiation.
6. Exclusivity and validity period. The LOI usually grants the buyer exclusivity during due diligence. Set the deadline and the exit conditions — to avoid being locked into exclusivity while the buyer drags out due diligence indefinitely.
7. Break fee. In significant transactions, consider negotiating a penalty for a buyer who withdraws without justified cause after signing the LOI — this protects the seller who has invested time and resources in the negotiation.

Frequently Asked Questions

Is the LOI binding? What happens if the buyer withdraws after signing it?

As a rule, the LOI is not binding with respect to the price and terms of the transaction — it’s a statement of intent, not a purchase and sale agreement. But it may contain specific binding clauses: confidentiality, exclusivity, and, in some cases, a break fee. If the buyer withdraws after the LOI without a break fee clause, the seller generally has no solid legal basis to demand compensation for the transaction not going through, unless they can demonstrate wrongful conduct (bad-faith negotiation, misuse of confidential information) under Articles 186 and 422 of the Brazilian Civil Code (Código Civil). Pre-contractual liability — a doctrine that allows for compensation when negotiations are broken off without justification — is recognized in Brazilian case law, but it requires proof that the injured party had a legitimate expectation that the contract would be concluded and incurred expenses justified by that expectation. In practice, a break fee is the most effective way to protect the seller: it sets the cost of the buyer’s withdrawal directly in the contract, without the need for litigation. This is general information and does not replace consultation with a lawyer regarding your specific case.

Can the buyer renegotiate the price during due diligence?

Formally, the LOI doesn’t bind the price — so the buyer can propose a revision at any point during due diligence. In practice, what often happens is called “price chipping”: the buyer uses due diligence findings (labor contingencies, environmental liabilities, customer concentration) to justify an adjustment to the price or payment terms. This is a normal part of M&A negotiations — the real question is how far the seller is willing to go and what they get in return. The founder should distinguish between two types of findings: (1) real contingencies that justify an adjustment (unprovisioned liabilities, undisclosed debt, fraud) and (2) normal business risks that the buyer is trying to monetize during the negotiation. For the first type, the adjustment is reasonable. For the second, the seller has grounds to push back — provided the risks were adequately disclosed in the data room. An effective tool for reducing the room for price chipping is vendor due diligence carried out before the negotiation begins — it anticipates the findings and reduces surprises during the process. This is general information and does not replace consultation with a lawyer regarding your specific case.

How does escrow work in M&A, and when does it make sense to use it?

Escrow is a deposit held in a segregated account, usually with a bank or custody platform, that retains part of the acquisition price for a period after closing to secure the seller’s obligations — primarily indemnification for breaches of representations and warranties (R&Ws). The mechanism works like this: at closing, the seller receives the price minus the escrow amount; the escrow remains on deposit during the indemnification period (typically 12 to 24 months); at the end of the period, the remaining balance is released to the seller, net of any successful claims brought by the buyer. Escrow makes sense when: the buyer has concerns about the seller’s future solvency (an individual seller, for example); the R&Ws cover risks that may materialize with a delay (tax liabilities, labor contingencies); or the transaction involves part of the price conditioned on future events (earn-out). The seller should negotiate: the escrow cap (a percentage of the price — typically 10% to 20%); the release timeline; the dispute resolution mechanism for claims; and early release of part of the escrow once the indemnification period for certain risks has expired. This is general information and does not replace consultation with a lawyer regarding your specific case.

The information in this article is general and educational in nature. It does not constitute legal advice for any specific situation and does not replace an attorney’s analysis of your particular case.

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Alessandra De Paula Souza — OAB/PR 31.133 (licensed attorney, Bar Association of the State of Paraná) Focused on M&A, corporate restructuring, and legal advisory for transactions involving startups and growth-stage companies. Full profile

This is general information and does not replace consultation with a lawyer regarding your specific case.