Protecting Equity Value Between SPA Signing and Closing in M&A Deals

19.5.2026 | ARROWS law firm

Signing the Share Purchase Agreement (SPA) is not the end of negotiations, but a shift in their focus. Between signing and final settlement, the value the owners actually receive (equity value) can change significantly. Working capital may drop, the earn-out may fail, or escrow accounts may be frozen. Sellers relying on optimistic forecasts often find out too late that the buyer’s promise has vanished. ARROWS, a Prague-based law firm, will show you how to protect your value already at the time of signing the SPA and actively oversee the entire process through to the final payout.

In the image, we see a lawyer addressing value protection issues in the sale of a company.

Equity value from theory to practice: What is actually paid out
Phase I: Signing the SPA and setting protections from the outset
Phase II: Earn-out – When the price waits for the future
Related questions on escrow and holdback
Phase IV: Change of control – Hidden risks in existing contracts
Phase V: Settlement – Cash true-up and final payout
Final summary

Equity value is shaped only gradually : The final amount the owner receives depends not only on the purchase price, but on how working capital is trued up, how the earn-out is calculated, and which warranties are later asserted.
Escrow and holdback are not just buyer protection : A properly structured escrow also protects the seller by ensuring access to information, transparency, and the ability to resist unjustified price-reduction claims in time.
Representations & warranties matter more than the price : Poorly drafted warranties and overly long claim periods later backfire in financial penalties or even the complete loss of the expected proceeds.
Earn-out is not only a bonus, but a mirror of risk : If you want to actually receive the earn-out, you need clearly defined KPIs in the contract, audit rights, and protection against the buyer’s discretion.

Equity value from theory to practice: What is actually paid out

Equity value, i.e., the value of shareholders’ equity, is theoretically straightforward: it is the price the buyer pays for the shares or ownership interests. In practice, however, things are different. During the process from signing the SPA to the final settlement, equity value is transformed based on the company’s actual position on the closing date and the results the company achieves during the agreed monitoring period. The value is therefore shaped in real time.

When the seller and buyer sign the SPA, they agree on the so-called Target Working Capital – the target working capital. This is an assumption as to what the level of current assets and liabilities will be on the closing date. If the reality on the closing date deviates from this target, the price is subsequently adjusted up or down.

If working capital is lower than agreed, the buyer keeps part of the money in escrow. If it is higher, the seller receives an additional payout.

This means that if, as the seller, you agreed on a purchase price of CZK 100 million, but on the closing date the working capital consists of mandatory inventory and receivables that later prove to be partially uncollectible, your equity value will decrease. Similarly, if the buyer manipulates costs during the earn-out period, it can artificially reduce profit and thus deprive your earn-out of additional funds.

The attorneys at ARROWS, a Prague-based law firm, can help you set up equity value protection already from the SPA preparation phase – meaning to safeguard payout mechanisms, clearly define calculation methodologies, and ensure that the buyer cannot later assert unjustified claims at its discretion.

Phase I: Signing the SPA and setting protections from the outset

The moment the SPA is signed is crucial. That is when the rules of the game are set for months or years ahead. Many sellers underestimate this phase—they think the SPA is just another piece of paper and want to close the transaction as quickly as possible. A mistake. A poorly drafted SPA will come back to you with double interest precisely at the moment when the money is not in your account.

Representations & warranties: A warranty that protects your position

In the SPA, the seller and buyer commit to a set of statements about the company’s condition—the so-called Representations and Warranties (R&W). The seller warrants that the company has no hidden debts or legal disputes, that the accounting is in order, that there are no issues with trademarks, that contracts with partners are valid, and that there are no change-of-control risks.

The gamble is that these warranties are often too general or too broad. The seller does not realize that later—for example, 18 months after closing—when the buyer discovers a tax issue from four years back, it may attack the seller on the basis that the warranties were breached and demand financial compensation (indemnification).

That is why it is critical for R&W to be subject to so-called sunset clauses—time limits after which the warranties expire. For ordinary commercial matters, 18 to 24 months is typically agreed; for tax and legal matters, the periods may be extended to the statutory limitation period for assessing tax (3–10 years depending on the type and circumstances under the Czech Tax Code).

Equally important is the basket—the minimum amount of loss from which indemnification can be claimed at all. If the basket is not set, the buyer can burden you with microscopic issues. A healthy basket in mid-market transactions is usually 0.5 to 1% of the purchase price; only once the loss exceeds this threshold does indemnification apply in full (a so-called “first-dollar basket”).

Likewise, the cap—the indemnification ceiling—protects the seller from having to pay without limitation. Typically, the cap is set at 5–10% of the purchase price. If you do not agree it, you could theoretically end up refunding the buyer a substantial part or even all of the price based on immaterial defects.

The attorneys at ARROWS, a Prague-based law firm, will help you negotiate R&W systematically: we will look for realistically defensible limits of your liability, introduce time limits and financial caps, and strongly discourage you from warranting matters you truly cannot control (e.g., the buyer’s future conduct after taking over the company).

Working capital and purchase price adjustment: The core of a future dispute

Working capital (WC) is calculated as the difference between current assets and current liabilities. It is essentially cash and liquid assets needed for the company to operate day to day—inventory, receivables, short-term debts.

In an acquisition, the so-called Target Working Capital is agreed based on historical data—commonly an average over the last 12 months. If working capital is lower on the closing date, the buyer withholds the difference as compensation. If it is higher, the seller receives the added value.

This is often where the source of unforeseen losses lies. The buyer may calculate working capital “its” way—especially if the contract is not sufficiently precise about what is included, how inventory is calculated, how receivables are reported, etc. This creates significant room for a dispute that can cost you millions.

The attorneys at ARROWS, a Prague-based law firm, recommend:

Do not agree on the price without a clear working capital adjustment mechanism. The SPA must precisely describe which items are included in working capital, which are excluded (cash, debt), how inventory is valued, and what exceptions apply.
Always secure an audit of the working capital calculation. After closing, the buyer will prepare the final working capital calculation themselves. You should have the right to have it verified by an independent accountant or audit firm. Without that, it is a shot in the dark.
Set time limits. The buyer should deliver the final working capital calculation approximately 60–90 days after closing. If the period is not limited, the buyer will keep you in uncertainty for months or years.

Phase II: Earn-out – When the price depends on the future

An earn-out is a mechanism where part of the purchase price is calculated retrospectively—the seller receives it if the business achieves pre-agreed targets over a certain period (typically 1–3 years). Specifically, the business must reach a certain EBITDA, revenues, number of customers, or meet other milestones. If it does, the seller receives a bonus. If not, they lose it.

Earn-outs have their advantages and pitfalls. For the seller, it is attractive because they can “take away” part of the value they believe they will create in the coming years. For the buyer, it is beneficial because it shifts part of the risk to the seller—they do not pay the full price “in the dark”.

But here is the catch: earn-outs are the biggest source of disputes in M&A transactions. Sellers believe the buyer will do everything to achieve the targets. However, the buyer may decide to fundamentally change the business, cut costs (and therefore profit), or simply run the company in a way that the earn-out is not achieved.

How an earn-out is structured: Defining the criteria and their interpretation

When negotiating an earn-out, you must define in the contract precisely:

Which KPIs are counted. Most often it is EBITDA, revenues, or a combination of both. EBITDA is a specific metric—it is earnings before interest, taxes, depreciation and amortization. But this is where problems begin: how are “adjustments” (individual expenses that should be added back) treated in EBITDA? The buyer may take control over deciding what is a “normal” cost and what is “one-off”—and thereby manipulate the result.

How EBITDA (or another metric) is calculated and reviewed. Exact rules must be set out in the contract. Which items are included in EBITDA, which are excluded (for example tax treatments, routine legal services, a force majeure penalty). Without this, “the buyer can do whatever they want”.

What the thresholds and payouts are. Typically, a minimum threshold (floor) is set that must be achieved for any earn-out to be paid at all, and a cap where the earn-out ends. Example: “If EBITDA reaches 5 million, we pay 1 million; if 10 million, we pay 2 million; the maximum is 2 million.” Without these rules, the buyer will claim the target was not met even if they make more than two million in profit.

How long the earn-out period is. Usually 1–3 years. The longer it is, the greater the risk that the buyer will change strategy, sell the company on, or simply “forget” the agreed targets. The seller should insist on the shortest possible period—ideally 12 months. The buyer, on the other hand, will push for the longest possible period to have more time for “optimisation”.

Earn-out: Monitoring and the right to an audit

The most common problem: the seller hears nothing from the buyer about how the company is doing until the earn-out is calculated—and then it is too late.

You must ensure:

Monthly or quarterly reporting. The buyer must send you financial reports (cash flow, revenues, costs). Without this, you cannot monitor whether the targets are being met or not.
The right to an audit. If the buyer claims EBITDA was, for example, 4.5 million when it was 5 million, you must have the right to have it verified by an external auditor.
Clear dispute rules. If you cannot agree on the earn-out calculation, the dispute should be resolved through expert determination, not dragged through court at will.

What happens if the buyer manipulates the earn-out

Although this is formally prohibited (so-called efforts standards exist—obligations for the buyer to run the company diligently and in good faith), in practice it is very difficult to prove that the buyer intentionally sabotaged your results.

Specific scenario: You sell a company for 10 million, with 6 million paid immediately and 4 million as an earn-out if revenues remain at least 20 million per year. After some time, the buyer decides to put the company into “restructuring”—they cut marketing, lay off salespeople, raise prices (so that revenues fall). Revenues drop to 15 million—no earn-out is paid. You will argue it was intentional sabotage, but proving it will be very difficult unless it is explicitly prohibited in the contract.

Our attorneys at ARROWS, a Prague-based law firm, can help you: Set a clear obligation for the buyer to run the company under “best efforts” or “commercially reasonable efforts”—meaning the buyer cannot knowingly sabotage the results. We will incorporate specific prohibitions into the contract—for example, that the buyer cannot, without your consent, dismiss key people, reduce margins below a certain level, etc. We will also negotiate mandatory involvement for you—so that you remain in management or in an advisory role for the duration of the earn-out, enabling you to oversee decision-making.

Phase III: Escrow, holdback and other security: Where your money gets “blocked”

Typically, the purchase price is not paid all at once. A portion is blocked in a so-called escrow account (a third-party account—usually held by an attorney, notary or bank) for a certain period, usually 12–24 months.

This escrow serves as insurance: if, during the escrow period, it is discovered that the seller warranted something that is not true (e.g., a hidden legal dispute, a tax issue, a key contract with a partner has disappeared), the buyer can “draw down” the amount from escrow as compensation without having to wait for a court decision.

Escrow is therefore a mutual protective mechanism. For the buyer, it is insurance. For the seller—if properly set up—it is protection precisely because:

The blocked funds are yours if nothing happens. After the escrow period expires, the money is automatically released to you if the buyer has not submitted any objections.

You have access to documentation. Under the escrow agreement, you should have the right to see what claims the buyer is making and have a chance to defend against them.

The buyer cannot claim anything at will. To draw funds from escrow, the buyer must identify a specific breach of the R&W and substantiate it.

The problem arises when:

The escrow period is too long. Two or three years of unnecessary waiting—that is a long time.
The escrow amount is too high. If the buyer withholds 40–50% of the purchase price, you are left with minimal funds for the next business steps or debt repayment.
The escrow agreement is unclear. If it is not contractually defined precisely which claims the escrow covers and how long the buyer has to submit a claim, the buyer can send you an objection on the last day and block your money for another 6 months.

Practical example: The seller believes that after 18 months the remainder of the price will be released from escrow. But in the last week of the escrow period, the buyer sends a notice of “discovering” a tax issue from the years when you were still in control and claims it will take a million from escrow. If you do not have a clear rule in the escrow agreement that claims must be submitted within a certain time, the buyer will block your money.

The attorneys at ARROWS advokátní kancelář can assist you: Set the escrow at a reasonable amount. Typically, 10–20% of the purchase price is a healthy standard. More is a risk for you. We will define the period for submitting claims. The buyer should have a deadline (e.g., 30 days after the escrow period ends) to submit a claim. After that, the funds are automatically released. We will ensure the escrow agreement protects your interests. It should include your rights to defend yourself, access to documents, and the option to use an independent arbitrator for disputes.

What risks you face and how to defend yourself

Potential issues	How ARROWS helps (office@arws.cz)
Poorly set representations & warranties – Later, the buyer blames you for matters you did not warrant, or, conversely, asserts claims even for very old or insignificant issues.	We will carefully review all R&W and set sunset clauses, baskets and caps. We will ensure you only warrant what you can truly control and that the time limits for bringing claims are reasonable.
Working capital: The buyer calculates WC “their” way – After closing, the buyer unilaterally claims that working capital is lower by millions and refuses to pay you the remaining price, or takes it from escrow.	We will set a precise WC calculation mechanism in the SPA, always with the right to an independent audit. We will build in a time limit (60–90 days) so the dispute does not drag on too long. We will ensure the methodology is not one-sided.
The earn-out is not met, but the buyer did not act in good faith – The buyer intentionally sabotages the achievement of the earn-out targets (laying off salespeople, cutting marketing) and refuses to pay you the earn-out.	We will set clear efforts standards in the SPA (at least “best efforts” or “commercially reasonable efforts”), include specific prohibitions (layoffs of key people, margin reductions), and create a dispute mechanism (arbitration). You will be able to prove the breach.
Escrow for too long and in amounts that are too high – Your money is blocked for 24+ months, 40–50% of the price sits in escrow, and you cannot access it.	We will negotiate better terms—reduce escrow to 10–20% of the price, shorten the period to a maximum of 18 months, and ensure a clear deadline for submitting claims. After the deadline, the funds are automatically released without further delays.
Change of control clauses in partner agreements – After a change of owner, a clause you overlooked may be triggered, and the buyer may lose key contracts.	We will conduct a thorough review of all agreements (a change of control audit), identify risk areas, and negotiate waivers or a substitution of contractual parties in advance so the transaction is not jeopardized.

Phase IV: Change of control – Hidden risks in existing contracts

Often overlooked: There are contracts that automatically change (or cease to be valid) at the moment a business changes owners. These are so-called change of control clauses.

Example: You have a long-term agreement with a bank that provides you with a credit limit of CZK 10 million. The agreement states: “If there is a change in the controlling owner (a change of more than 50% of the shares), the bank has the right to terminate the agreement without compensation.” On the day of closing, someone else becomes the owner, the bank is informed, and the next morning your agreement is terminated. Result: you lose liquidity, and the company may end up in insolvency.

Types of change of control clauses:

Contract termination clause. The bank, supplier, or customer reserves the right to terminate the contract if there is a change of owner. This is the worst-case scenario.
Clause requiring prior consent. The partner reserves the right to approve or reject the new owner. If they approve—great, the contract remains in force. If they reject—the contract may be terminated.
Clause with an automatic change of terms. The price increases, deadlines change, etc. The contract technically remains in place, but the terms worsen.

How can ARROWS attorneys help you? We will carry out an in-depth audit of your existing contracts, identify change of control clauses, and map their risks. We will then negotiate with business partners to obtain consent to the transfer/continuation of the contracts—ideally before the transaction is signed. If no agreement is reached, we will address the risk directly in the share purchase agreement (SPA)—either by a clause shifting responsibility to the buyer or by an appropriate reduction of the purchase price.

Phase V: Settlement – Financial settlement and final payout

Settlement is the point at which it is finally calculated who owes what to whom. It usually takes place in the following steps:

Signing – You sign the SPA, typically with part of the price paid immediately (if a “simultaneous sign and close” is agreed), and part blocked in escrow.
Interim period – Between signing and final closing, the conditions (Conditions Precedent) are satisfied—e.g., obtaining regulatory approval, arranging financing, etc.
Closing – Ownership is finally transferred and the buyer pays the money (or transfers it into escrow).
Post-closing – Over the following months, adjustments (working capital, earn-out, etc.) are calculated, and if necessary the money is paid up or returned.
Settlement – Once all adjustments have been calculated and everyone agrees on the figures, the final settlement and payout of the remaining funds takes place.

Critical moments for loss of equity value:

As soon as the buyer delivers the escrow statement – If it contains high claims, there will be a dispute over them. Without preparation, you will not be able to defend yourself effectively.

As soon as the earn-out is calculated – If the method is not clear, a dispute will be inevitable.

As soon as the final WC adjustment is calculated – This is typically where millions are decided.

ARROWS, a Prague-based law firm, will provide you with comprehensive legal support at all stages of your transaction. Our attorneys in Prague will carefully monitor compliance with all deadlines and contractual obligations of both parties and, if the buyer raises an unjustified claim, will stand up for you and negotiate a remedy. If the situation escalates into a dispute, they will represent you in arbitration or court proceedings. Last but not least, they will ensure that the funds are paid out exactly in accordance with the executed agreement and without any unnecessary delays.

How to protect equity value at each stage

Phase	Risk	Defence
SPA preparation (Representations & warranties)	Overly broad or vague warranties; no sunset clauses; no basket/cap	Limit R&W to matters you truly control. Set sunset clauses (12–24 months, longer for tax matters). Introduce a basket (0.5–1% of the price) and a cap (5–10% of the price).
Working capital adjustment	The buyer calculates WC their own way; no audit; no time limit for disputes	Define the WC methodology precisely (what is included, what is excluded). Arrange an independent audit. Set a deadline of 60–90 days.
Earn-out	Vaguely defined KPIs; no right to monthly reporting; no right to audit; no effort standards	Define KPIs, the calculation methodology, thresholds and caps precisely. Ensure monthly reporting. Negotiate the right to an audit. Set effort standards (“best efforts” or at least “good faith”).
Escrow and holdback	Escrow too high (30–50% of the price); too long (24–36 months); no deadline for submitting claims	Limit escrow to 10–20% of the price. Set a maximum of 18 months. Introduce a clear deadline for submitting claims (30 days before escrow expiry).
Change of control	A hidden change of control clause in partner agreements; loss of a key contract after closing	Audit all contracts before the LOI. Negotiate a waiver or a substitution of contractual parties. Include the risk in the SPA and adjust the price accordingly.
Post-closing adjustment and settlement	No clear structure for dispute resolution; no escalation mechanism	Set a clear rule for calculations, a deadline for raising objections, and arbitration as the dispute resolution method. At least one party should have the right to an independent audit/expert determination.

Final summary

Equity value—i.e., the money you as the seller actually take away—is not shaped only on the day the SPA is signed, but gradually develops all the way through to the final settlement. Between these phases, you can lose tens of percent of the originally agreed price if you do not actively and strategically protect your position.

The key to protection is that things must be set up correctly from the outset—at the moment the SPA is negotiated. Once the SPA is signed, your options are already limited. If you neglected baskets, caps, and sunset clauses for R&W, if you do not have a clear mechanism for calculating working capital, if the earn-out is not contractually defined—then all you can do is hope the buyer behaves fairly. That is far too risky an approach.

ARROWS advokátní kancelář attorneys specialize precisely in setting up these protective mechanisms. From the LOI phase through to the final settlement, they help you:

Analyze risks and map where you are at risk of losing equity value.
Negotiate terms so that they are fair and enforceable.
Monitor performance by the buyer.
Defend against unjustified claims for a price reduction.
Resolve disputes through arbitration, expert determination, or legal representation.

If your goal is for your equity value to actually land in your account without unnecessary losses and undue delays, contact the attorneys at ARROWS, a Prague-based law firm, at office@arws.cz. We will help you structure the transaction to be secure and protect you at every stage.

Frequently asked questions on protecting equity value in M&A transactions

1. What is the difference between equity value and enterprise value?
Equity value is what belongs to the owners—i.e., the price of the shares/ownership interests adjusted for debt and cash. Enterprise value is the total value of the business regardless of who owns it. In an acquisition, what is typically purchased is equity (shares/ownership interests), so equity value is what matters to you.

2. Do I need to have a working capital audit even if it is stated in the SPA?
Yes. An audit ensures that if the buyer claims that WC was lower, you will have independent evidence. Without an audit, in the event of a dispute you will be in a difficult position—it will be your word against theirs. Our attorneys in Prague at ARROWS can help set up the audit so that it is fair. office@arws.cz.

3. What percentage of the purchase price should be in an earn-out?
Typically, 20–40% is standard. More than 40% is too risky for the seller. Less than 20% may not even be worth addressing—the dispute may cost you more than the earn-out is worth.

4. What happens if the buyer does not comply with effort standards and the earn-out is not achieved?
If it is contractually agreed (and it should be), you can sue for breach of contractual obligations. However, proving sabotage will be difficult—which is why it is important to have specific prohibitions in the SPA (layoffs, margin reductions) rather than relying only on a general “efforts standard”.

5. What are the most common mistakes sellers make when preparing for M&A?
Underestimating the work on the SPA (the idea that it is just paperwork); failing to disclose change-of-control risks; absence of a methodology for calculating WC and the earn-out; escrow that is too long and too high. Most mistakes are, however, avoidable if addressed in time. Our Prague-based attorneys at ARROWS will help you avoid all of these mistakes – office@arws.cz.

6. How much time will settlement take, and what are the typical time windows?
From signing the SPA to closing, it is usually 2–4 months (if there are no obstacles such as regulatory approvals). From closing to the final settlement of all adjustments, 2–6 months. In total, therefore, 4–10 months. The key is to have clear deadlines in the SPA so that the whole process does not drag on.

Notice: The information contained in this article is of a general informational nature only and is intended for basic orientation in the matter under the legal framework as of 2026. Although we take the utmost care to ensure accuracy, legal regulations and their interpretation evolve over time. We are ARROWS, a Prague-based law firm, an entity registered with the Czech Bar Association (our supervisory authority), and for maximum client protection we are insured for professional liability with a limit of CZK 400,000,000. To verify the current wording of regulations and their application to your specific situation, it is necessary to contact ARROWS directly (office@arws.cz). We accept no liability for any damages arising from the independent use of the information in this article without prior individual legal consultation.

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