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Completion accounts in share and asset purchase transactions
A key feature of share and asset purchase transactions is formulating a mechanism for determining the purchase price payable by the buyer for the target shares or assets. Often, the purchase price is fixed. Sometimes, however, a completion accounts mechanism is adopted, where the final purchase price is ascertained post-completion by reference to accounts relating to the target company or assets drawn up to the completion date. In recent times this has become a popular approach when structuring transactions.
Completion accounts are produced in accordance with an agreed methodology specified in the relevant purchase agreement. In relation to share purchases, they are normally used (i) to confirm whether the financial position of the target company at completion is consistent with the position shown in the accounts on which the buyer based its original valuation of the target company and/or (ii) to test certain assumptions the buyer may have made when calculating the purchase price - the buyer may, for example, have assumed a particular level of net assets or working capital. In relation to asset purchases, they are simply used to ascertain the actual value of the assets being acquired.
Completion accounts in a purchase agreement will be accompanied by a mechanism allowing the purchase price to be adjusted (upwards or downwards) in the event that the financial position of the target company or business at completion (as shown in the completion accounts) differs from the assumed position.
The most common price adjustments based on completion accounts include the following:
Asset adjustment: this involves determining the value of all the target assets being acquired at completion.
Net asset adjustment: this involves determining the net asset value of the target company at completion (i.e. deducting the aggregate liabilities of the target company from its aggregate assets).
Working capital adjustment: this involves the buyer paying or being reimbursed for any working capital in the target company at completion that exceeds or falls below an agreed “normal” level of working capital.
Cash free/debt free adjustment: this involves the buyer and seller agreeing an enterprise value for the target company before the acquisition agreement is entered into (which value will exclude the target company’s cash and debt). Following completion, accounts are drawn up to determine the level of cash and debt in the target company at completion. An overall price for the target shares will then be determined by adding to the enterprise value the amount of any cash and deducting any debt.
The initial set of completion accounts are usually prepared by either the buyer’s or seller’s accountants for approval by the other. In the event of a dispute as to the accuracy of the accounts, this will usually be referred to an independent accountant for resolution.
In conclusion, the use of completion accounts in share and asset purchase transactions can be exceptionally useful to both buyers and sellers. However, care should always be taken to ensure that an appropriate type of adjustment is sought and that the component parts of the completion accounts mechanism are carefully considered and tightly defined. The involvement of a solicitor and an accountant throughout this process is highly recommended.
If you would like to discuss any of the topics within this blog please get into contact with Agata Rumbelow .
Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.