Basis for pricing in M&A transactions

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As a buyer, there may be a price or earnings multiple or other basis which you use to value the business or company that you buy.

In such instance, you may want to consider including a clause in the sale and purchase agreement to state that the parties acknowledge that the price for the business or shares has been calculated on this basis and any damages for breach of warranty will be calculated by reference to the basis.

Although the clause may not be regarded as conclusive in a court, it is likely to be helpful to the buyer in determining the damages.

However, it should be noted that such clause should be a reasonable estimate of the buyer’s loss so that it will not be deemed as a penalty and rendered unenforceable.

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This post was first posted on Linkedin on 1 June 2021.

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