- Completion accounts
Completion accounts28th June 2021 - Published by Kuits Corporate team
The purchase price is of prime importance to any share sale or purchase. With the uncertainty of the impact on the economy of Brexit and Covid-19, it is possible that we will start to see more of a move away from the recent locked box trend pricing mechanism. Buyers may be more likely in this climate to require protection from overpaying for the business based on its position at completion and against any downturn in the business post-completion and they may therefore increasingly insist on completion accounts structures and/or deferred consideration or earn-out structures (where all or part of the purchase price will be calculated by reference to the future financial performance of the target company).
Completion accounts are useful to confirm whether the target’s completion financial position is as expected when compared to the latest accounts from which the valuation has been determined and to test and verify any financial assumptions/conditions the buyer may have made when setting the price (often relating to there being a specific amount of working capital, cash, debt or net assets at completion).
Typically completion accounts adjustments are based on either:
- the target’s net asset value at completion with an adjustment being made to the purchase price to the extent that the net asset value at completion as shown in the completion accounts is more or less than an agreed figure; or
- a cash free/debt free and working capital position whereby the price is adjusted for any working capital (as confirmed in the completion accounts) at completion in excess of a “normalised” level coupled with agreeing an enterprise value (such as a multiple of EBITDA) excluding cash and debt. The completion accounts will then determine the amount of debt and cash at completion with the excess cash being added to the price and the debt being deducted from it.
Key features of a completion account
Key features of a completion accounts mechanism and matters to consider are:-
- Confirm the final price after completion: Establishes the price by reference to the financial position of the business as at the date of completion by carrying out a post completion accounting exercise with further payments then being required by either the buyer or sellers to reflect the determined price if too little or too much was initially paid at completion.
- Deciding how much to pay at completion: The parties will both want to make sure what is paid at completion reflects the final price as closely as possible. The sellers will not want to wait until the completion accounts are finalised to receive an additional payment (especially if there is any risk relating to the buyer’s ability to pay) and likewise, the buyer will want to avoid over paying by a large amount at completion. Often the parties’ accountants will agree a figure before completion based on the financial information available being an amount that they consider is approximately what the final price determined via the completion accounts will be (with some headroom to protect both parties). The buyer will often in that event, pay an amount on account of the final purchase price at completion or alternatively, often a sum is placed in an escrow at completion as security for any repayment that may need to be made by the sellers.
- Warranties and indemnities: It is important that the parties’ advisers carefully consider how the warranties and indemnities given by the sellers in the share purchase agreement and the completion accounts mechanics fit together to make sure that there is no double counting or double recovery. For example, typically the share purchase agreement will make it clear that the sellers are not liable under the warranties or indemnities to the extent that a matter has already been provided for in the completion accounts.
- Process: The detailed process of preparing and agreeing the completion accounts as well as the accounting policies and rules that must apply to them will be set out in the share purchase agreement. Usually one party prepares the completion accounts within a specified period after completion and the other party has a period within which to review and if there is any dispute that cannot be resolved an independent account is instructed to resolve the dispute. There are numerous considerations in relation to the process which should be documented in the share purchase agreement, including who bears the costs for each stage and making sure the process and timescales are achievable and workable from a practical perspective. There is a risk of a significant delay in the final price being agreed if there is a dispute. It is therefore important that the share purchase agreement is as clear and detailed as possible in order to minimise the scope for costly disputes.
- Accountants: The parties’ accountants will be heavily involved in the drafting and negotiating of the completion accounts provisions in the share purchase agreement including in particular, any specific accounting policies that must be followed.
Speeding up a deal timetable
As well as ensuring that the buyer pays a fair price and that the sellers receive the value and economic benefit in the target up to the point of completion, completion accounts can help speed up a deal timetable as the buyer has the comfort that it will have the chance to test the financial position after completion.
Get in touch with a Corporate Partner in Manchester
We can guide you through the legal aspects of the process of a company or business sale and purchase including the pricing mechanics and work seamlessly with your accountants throughout the process of negotiating and drafting the completion accounts provisions.