Anyone purchasing a business typically bases their offer on the company’s most up-to-date financial statements. Yet, these accounts show only the business’s historical financial position to its latest accounts date, with a period of time before the completion which won’t be covered.
For that reason, it’s often agreed between the parties to produce a new set of business accounts following the completion to cover that period, and these are called “completion accounts”. A purchase agreement sets out the method to adjust the buying price following the completion should the company’s financial position in its completion accounts differ from their expected position.
Common Completion Accounts Price Adjustments
Net assets – These adjustments determine the NAV (Net Asset Value) of a company at the point of completion. This represents its total assets with its total liabilities subtracted to consider both long-term liabilities and fixed assets. There is then an adjustment to the purchase price to reflect the extend the NAV at the point of completion differs from the agreed target figure.
Working capital – These adjustments involve buyers paying for any company working capital at completion in excess of the agreed “normal” working capital level, or alternatively, receiving a reduction in the price if the working capital falls below that agreed benchmark figure.
Net current asset (NCAV) – These adjustments involve the company’s liabilities being deducted only from its current assets value.
Establishing the adjustment form that is to be used is important in order for the share purchase agreement to document this accurately.
While each party typically uses their own accounts to help with reviewing or compiling their draft completion accounts, it is a process that may take months to complete, so the final sale price won’t be confirmed until agreement has been reached on the completion accounts. Disputes and delays commonly arise regarding the calculations and process itself.
It’s possible to reduce the chance of a dispute arising by ensuring the purchase agreement terms are clear.
Both parties should attempt to agree on a completion payment that reflects the most reasonable estimate possible of the company’s financial position on completion to reduce cash flow problems and risks associated with not being able to recover the further amount.
An agreement should also be reached on the content and form the completion accounts should take as well as the accounting methodology and standards to be used when preparing them.
Both parties need to agree on any policies that should be applied regarding asset and stock valuations, property depreciation, bad debts, and other aspects of the purchase, as well as on the period the completion accounts should cover, and the timeframe for their preparation and agreement.
Finally, agreement should be reached about the sanctions that will apply if either of the parties fails to comply with that timetable.
Other Tips To Avoid Disputes
Not only should all parties read the purchase agreement terms and understand them fully, but they should also raise any objections regarding the draft completion accounts promptly.
Communication between the parties should continue, and if deadlines can’t be achieved, communicating this promptly is key to agreeing to a new timetable.
Should another party no longer be cooperating, seeking legal advice is vital to determine the most appropriate action to take.
While, typically, agreements provide for the referral of any dispute to an independent expert accountant to be determined, this is often expensive and causes further delays, therefore resolving any disputes is usually in the best interests of all parties without having to resort to a process of formal dispute resolution.