DD impact on the SPA Terms
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Hi Gabriel,
I will address 3 items that I see them quite often.
1. Purchase Price Adjustments – in accordance with DD findings, that the growth expected by the owner, looks a lot softer from Commercial DD. In this case, an earnout would be included together with the formula for calculating the earnout. E.g. For a growth of x%, we would pay xEBITDA for the years x-y.2. Indemnities, if DD finds there are pending litigation cases, to shift the risk from the buyer to the seller, in case of specific customer or supplier disputes, ongoing litigation. “The seller shall indemnify the buyer for costs arising out of the legal proceedings related to x”
3. Covenants – If DD shows a certain level of profitability and a high customer concentration, the buyer would want to own at closing, what they see in DD, so they would use a covenant to prevent the Seller from “amending, terminating, entering into any material customer or supplier contract”.
1. Representations and warranties to confirm the company’s condition
2. Disclosure schedules to note exceptions
3. Indemnification provisions to allocate risk
4. Covenants or conditions precedent to address ongoing obligations or unresolved issues.Based on my experience, Due Diligence Findings are usually addressed in the SPA, either in Representations & Warranties, Indemnification, or Covenants (Conditions Precedent or Conditions Subsequent). They may also be considered in the payment structure, e.g. deferred compensation or earn out.
Additionally, some topics are also addressed in business valuation, e.g. financial and tax DD findings.To answer your question, the most common clauses are:
1. Representations & Warranties, to confirm the accuracy of DD findings. Gaps or risks identified in DD are either carved out via disclosures or specifically warranted.
2. Disclosure Letter / Schedules. Formally document exceptions uncovered in DD, qualifying or limiting the seller’s warranties.
3. Indemnities. Address identified, quantifiable DD risks such as pending litigation, environmental contamination or tax exposures).
4. Purchase Price Adjustments. Reflect DD findings on working capital, debt, or future performance uncertainty.
5. Conditions Precedent (CPs). Require remediation of DD issues before closing like regulatory approvals, contract consents, restructuring steps, settlement of disputes etc.
6. Covenants (Pre- and Post-Closing). Oblige actions to mitigate DD risks.
7. Limitations of Liability. Allocate DD-driven risk through caps, baskets, survival periods and exclusions (often tighter where DD risks are well understood).
8. Termination & Walk-Away Rights, triggered by failure to resolve material DD issues or breach of CPs prior to closing.
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