Completion Accounts – What Are They And Why Do They Matter?

In a previous post, we made reference to the potential for ‘completion accounts’ being involved in determining the price that sellers actually receive for their shares in terms of a share purchase agreement (as well as how this price can be drastically different to the headline price that they think they have agreed!).

The below should help to explain a bit more about what completion accounts are and why they matter.

1. What are ‘completion accounts’?

At its most basic, completion accounts are simply a set of accounts that are drawn up for the purpose of the sale / acquisition and then used as a basis for adjusting the price. The adjustment will be based on how certain numbers in the completion accounts (such as debt and cash, occasionally taking into account an adjustment for normalised working capital – on which please see the previous post noted above) compare against the equivalent target numbers that were agreed before completion.

These accounts are normally (but not always) brought down to the date of completion and so will not be able to be finalised until after completion has taken place. Given that, the share purchase agreement needs to provide a mechanism for their preparation and agreement.

2. Who produces them – and what if we don’t agree?

Where it has been agreed that completion accounts will be required, the share purchase agreement should contain a detailed process for the preparation of these accounts. This will include a computation methodology setting out the accounting principles that will guide the preparation of the first draft of the completion accounts, and will specify how long the parties have to raise any issues in connection with the draft completion accounts. The agreement will also typically contain a dispute resolution mechanism  setting out what happens if where the parties cannot agree the completion accounts within the relevant timescales. This can include a provision whereby an independent expert is appointed to resolve any disputes.

Each step of the completion accounts process will be subject to a time limit (with the potential for deemed acceptance if you don’t challenge in time) so it is vital that you keep a note of these deadlines and respond in time (or at least make sure that your accountant responds on time on your behalf). The idea is that each step of the process reduces the matters in dispute so that if ultimately you do have to appoint an expert, then they are only looking at a very small number of matters.

3. Speak to your professional advisors – ASAP

No matter whether you are buying or selling, the drafting of completion account provisions is an area in which you, your lawyer and accountant will need to work closely – so early engagement with those advisors is vital.

Just some of the points that will need to be considered are:

• the level of the target figures to make sure they are appropriate – the one that is often the most contentious is working capital;
• what should be included in / excluded from certain categories of asset or liability (e.g. to make sure no accidental double counting);
• the policies to be applied in preparing these accounts (e.g. should it just be on the same basis as the last annual accounts of the acquired company or should any specific policies be applied); and
• how the price will be impacted by the adjustment (e.g. is it a straightforward “£ for £” adjustment, downwards only, subject to an overall cap etc).

It is not unusual for the parties and their advisors to exchange draft spreadsheets in relation to these accounts ahead of completion. This is something that I recommend as it can be very helpful to clarify exactly how certain accounting adjustments / treatments will impact on the numbers and the overall price. However, it is vital to remember that these spreadsheets don’t take the place of the completion account mechanism in the SPA – if the principles on which those spreadsheets are based don’t make it into the SPA then they won’t be enforceable!