Completion Accounts in M&A

So, you have agreed the headline price to be paid for the target company and the due diligence process is set to be completed. To ensure movements or discrepancies between the signing date and closing date are appropriately adjusted, choosing an appropriate closing mechanism is vital to any M&A transaction. The two most widely used mechanism to give effect to such adjustments and finalise the consideration payable by Buyer, are: 
  1. Completion account mechanism
  2. Locked box mechanism 

Completion Accounts In Mergers & Acquisitions

Completion account mechanism: 

Under this mechanism, the parties to the M&A transaction agree to a valuation (commonly referred to as enterprise value) at signing stage. However, final consideration (commonly referred to as equity value) payable by the Buyer is only determined based on the financial position/balance sheet of the company at the time of completion of the transaction. Completion accounts is prepared as at the date of completion and as a result, adjustments are applied to the final equity value.  Such completion accounts typically show the closing Profit & Loss and balance sheet showing the results of the company to the completion date. However, to ensure clarity it is essential that the Share Purchase Agreement (SPA) must include provisions regarding the following: 
  • The accounting standards and policies to be followed for preparation of completion accounts. 
  • The party (Buyer or Seller) who would prepare the draft completion accounts and the party who would review the same. 
  • Time allowed to prepare and review same.  
  • A proforma or example completion statement showing the calculation approach for post completion adjustment. 
  • A completion accounts resolution process to be followed when any item in completion accounts is not agreeable to any concerned party. 
One the major advantages of the completion account mechanism is that Enterprise Value is adjusted euro-for-euro to arrive at a final equity vale. However, the same also acts as a major disadvantage considering the time-consuming discussions that parties undergo leading to uncertainty over the closure of M&A transaction itself.  

Locked box mechanism: 

Under this mechanism the adjustments are applied according to the balance sheet prepared at a date prior to the completion. Locked box as the term suggests ensures that parties are protected from price uncertainty, as no value is permitted to leave the business between the locked box date and the final completion date.   The Buyer will typically seek protection under the SPA against any value extracted by the Seller between the locked box date and closing date (often known as ‘leakage’). Some examples of leakages are Dividends, ex gratia payments, transaction fees, transaction bonus paid to staff, etc. The Seller, on the other hand provides a warranty or indemnity to the Buyer, against any leakages except for items specifically agreed upon in the SPA (also known as ‘permitted leakages’). Few examples of the permitted leakages are salaries payable to the Seller in normal course or any intra-group payments in the normal course of business  The locked box date should be carefully considered. On one hand the Buyer may seek to minimise the time gap between the locked box date and closing date to avoid the risk of leakages. On the other hand, it is also important to have enough time between both the dates to prepare and review the locked box Balance Sheet.   One of the major advantages of locked box mechanism is that it provides a price certainty to both the Buyer and Seller, from an early stage, the same also acts as a disadvantage to the Buyer as it calls for enhanced due diligence and creates dependence on warranties provided by the Seller.  Cooney Carey has a dedicated team of experts to help you identify these issues and effectively execute such transactions.