August 9, 2023
Corporate Law

Completion accounts are a set of accounts drawn up following completion of a business purchase. They show the target’s (the business being acquired) financial position on the day of completion. Completion accounts are not the only method adopted by buyers and sellers of a business to make sure that the price paid for the business is fair. Another method that is often adopted is the “locked box” mechanism which involves calculating a fixed purchase price before the transaction completes. The locked box mechanism will be discussed in another blog.

Why Are Completion Accounts Drawn Up?

When coming up with the price for the target the buyer will have made certain assumptions about the state of the target. One of these assumptions will be the financial position of the target at completion.

While the buyer will have carried out financial due diligence on the target before completion, that due diligence will have been based on the latest set of accounts filed at Companies House (which will therefore be out of date) and based on information which the seller has provided the buyer with which may not be reliable.

By having its own accountants assess the financial position of the target at completion the buyer will have a true picture of the financial state of the company at the time it buys the target.

What Do Completion Accounts Measure?

The assessment of the target’s position at completion will take into account certain assets and liabilities of the target. What those assets and liabilities are will depend on the nature of the target’s business and the basis upon which the buyer has valued the target to arrive at the offer price.

The most commonly adopted price adjustment mechanisms used for completion accounts are set out below.

Cash Free/Debt Free Working Capital Adjustment

This adjustment mechanism is used when the buyer has calculated an enterprise value for the target usually based off a multiple of EBITDA. The figure excludes cash and debt and assumes that a certain level of working capital will be in place on completion.

The completion accounts will therefore be drawn up to determine the target’s cash, debt and working capital position on completion. Once these figures are known, the purchase price for the target will be adjusted upwards or downwards and either the buyer will need to pay more for the business or the seller will need to reimburse the buyer for the drop in value. For example, if cash in the business is £1 million while debt in the business is £2 million while the working capital target was set at £2 million while the actual working capital in the business was £1.5 million this would leave a negative figure of £1.5 million which the seller would have to pay back to the buyer. The table below illustrates this.

 £ million£ million
Enterprise Value (paid on completion) 20
Plus Cash1 
Less Debt2 
Difference = net debt adjustment (1)
Actual working capital1.5 
Agreed working capital target2 
Difference = working capital adjustment (0.5)
Equity Value 18.5
Amount to be paid back to the buyer 1.5
Table illustrating completion accounts adjustment

The above illustration refers to the buyer needing to be paid back £1.5 million from the £20 million it spent on completion. In practice one would hope that the completion account figures would not have been a great surprise to the buyer, the buyer having done financial due diligence on the target prior to completion. In such a case one would expect the buyer to refrain from paying all of the purchase price on completion, holding back a sufficient portion to cover the expected reduction.

Net assets adjustment

An alternative approach to preparing completion accounts involves determining the target’s net asset value at completion (taking account of fixed assets and long-term liabilities). With that information, the purchase price is then adjusted to the extent that the actual net asset position on completion differs from the target figure that was agreed in the share purchase agreement.

Preparing completion accounts on the basis of a net assets figure (rather than a cash free / debt free basis) tends to happen more on transactions where it is the fixed assets of the target that make up its value, for example, where the target owns properties.  

How Are Completion Accounts Prepared?

Unlike the preparation of statutory accounts which are filed at Companies House each year, there is no legislative framework that governs how completion accounts should be prepared, This means that the parties must agree on the format, content and basis upon which completion accounts will be prepared.

Usually, the mechanics governing the preparation of completion accounts are included in a separate schedule at the back of the share purchase agreement. The key issues addressed by the schedule include:

  • The form and content of the completion accounts.
  • The accounting principles to be applied in their preparation.
  • The procedure for drawing up and agreeing the completion accounts.
  • The procedure for resolving any disputes concerning the preparation of the completion accounts.
  • How the price will be adjusted by reference to the financial information shown in the completion accounts.
  • When any adjusting payment must be made and how it will be satisfied.

What period do the completion accounts cover?

Typically, completion accounts span the period from the date to which the target’s last statutory accounts were prepared, to the date of completion.

As there is likely to be some movement in the target’s financial balances throughout a working day, it may also be necessary to specify the time of day on completion up to which the accounts will be prepared to.

If, given the money flows in the target, it will be practically difficult to prepare completion accounts other than, say, at the end of a month then the parties should consider co-ordinating completion to occur at the end of the month.

Price Adjustment Mechanism

The share purchase agreement should detail how the provisional purchase price will be adjusted to reflect the target’s financial position as shown in the completion accounts.

A common approach is for the purchase price to be increased or reduced (as the case may be) on a pound for pound basis.

Building on this approach, in our experience it is often useful, especially where the target is being purchased on a cash free/debt free basis, to build in “de minimis” provisions in other words provisions allowing variants of the provisional purchase price up to a certain level. For example, on a £1 million acquisition disregarding variants that would amount to less than £20,000 either way.

It is very much up to the buyer and the seller to decide what their tolerance level would be but the last thing either party will want is their advisers arguing over whether a low value item should be included as cash or debt and incurring large professional fees in the process.

Other things to consider with the price adjustment mechanism is whether adjustment should be allowed both ways. It usually is unless one of the parties is in a particularly strong negotiating position.

The buyer may insist on capping the amount of any potential uplift if the buyer simply cannot afford to pay more than a certain price for the acquisition. Similarly, the seller may insist on a floor below which the purchase price cannot be reduced although it would be unusual for a buyer to accept such an arrangement.

Role of the Parties’ Accountants

It is important that the parties engage accountants with experience in dealing with mergers and acquisitions. Key areas where the accountants and others in the financial team will be needed include:

  • Setting benchmark figures such as target working capital
  • The format and content of the completion accounts
  • Definitions of cash, debt and potentially other assets and liabilities
  • The accounting rules governing the preparation of the completion accounts.

In addition to the above and to some extent so that they can help effectively with the above, the parties’ accountants should be involved in or made clearly aware of the outcomes of the financial due diligence undertaken on the target and on the drafting of relevant warranties in the share purchase agreement.

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