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:
- Completion account mechanism
- Locked box mechanism
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.