Understanding Completion Accounts
21st February, 2020
Completion accounts are a common method used to confirm and adjust the purchase price when buying or selling companies.
Their purpose is to confirm the actual financial position of the target company at completion of the sale transaction and, if this is different to what was estimated or expected, allow the purchase price to be adjusted up or down after the transaction documents have been signed.
Completion accounts are used to verify the net assets and/or working capital of the company or other accounts based measurements as at completion that are key to valuing the business being acquired. The completion accounts are typically prepared by the purchaser’s accountants within an agreed period after completion and, once finalised, may cause an adjustment of the purchase price – whether by a repayment of part of the purchase price by the seller to the purchaser or an additional payment by the purchaser to the seller. Detailed accounting principles and bases to be applied when preparing the completion accounts are normally confirmed in the transaction documents.
A mechanism will typically be included for the completion accounts to be settled by an independent accountant in case the purchaser and seller cannot agree the content of the completion accounts.
An alternative to using completion accounts, but perhaps less common, is the ‘locked box’ method. This creates a fixed purchase price by reference to an agreed value of the company as at a date in the recent past (e.g. the end of the last accounting period).
No adjustment is made to the price after the completion date, but the seller typically gives the buyer protection against any unpermitted cashflows or ‘leakage’ (e.g. dividend payments and bonuses) between the locked box date and the completion date which would reduce the value of the target company.
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Stuart Scott-GoldstoneCorporate & Commercial Head of Team & Partner |
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