Completion Accounts: negotiating until the very end

Krzysztof CIESIELSKI
M&A and Corporate Advisory Director at RSM Poland

Completion Accounts is one of the two mechanisms (the other being the Locked Box) used to determine the final price in the process of closing M&A transactions. In this model, the final acquisition price is determined only on the basis of the balance sheet of the target entity prepared as at the date of signing the final contract that transfers the ownership from the Seller to the Buyer. However, the practice shows that preparing such data for the said date is actually impossible, and the process of obtaining and processing it can take weeks or even months after the Share Purchase Agreement has been concluded. So how does it work?

Basis for pricing

The name of the mechanism, Completion Accounts, reflects what it is all about quite comprehensively. Completion Accounts is the “completion” documentation that primarily includes the balance sheet and a profit and loss account prepared for the target company as at the date of completion of the transaction based on the guidelines presented in the Share Purchase Agreement. However, as I have already mentioned, the process of preparing it sometimes continues long after the sales contract has been signed. Why is that so?

The Buyer is responsible for compiling and preparing the data being the basis for determining the final price, and it is very often the Buyer who draws up Completion Accounts.

This results from the fact that from a formal point of view, i.e. on the basis of a concluded SPA, the Buyer is the owner of the target company at the time when the final price is being determined. Thus, the Buyer has full access to any documentation of the entity taken over. It should be pointed out that the sales contract that has been signed usually obliges the Seller to cooperate in this respect.

In the Completion Accounts mechanism, the expected (approximate) acquisition price, which is being calculated and settled as at the date of signing the final contract, is usually based on estimates. It is then adjusted so as to arrive at a final acquisition price once relevant data prepared for the transaction closing date is available.

In practice, the Share Purchase Agreement maps out, in detail, not only the structure of the price itself, but also its different components that will eventually be adjusted. The methodology of price adjustment often includes the following elements:

• the level of EBITDA achieved by the target company, multiplied by a relevant (arms length) indicator of its multiple, determining the value of the target company: this is usually a fixed price component,
• working capital and net debt, usually subject to a significant review and adjustment.

It should be noted here that the concepts of a working capital and net debt are often re-defined and their contents are adjusted to a specific transaction; therefore, their wording is usually clearly described in detail in the contract.

Deal is done, so let’s sail to shore

As compared with the acquisition price initially set on the basis of estimates, the final price can be one of the three options:

• it stays the same, which is highly unlikely,
• it is higher and the Buyer makes a top-up payment to the Seller,
• it is lower and the Seller repays part of the price to the Buyer.

What should be mentioned here is that collar can be applied, meaning that you define the level of adjustment for which no price revision is necessary.

The price calculated by the Buyer together with its components are all subject to verification by the Seller, and if there are no reservations, the Seller gives its final approval. However, life is like a box of chocolates and moods can change. It happens that final price adjustments raise doubts and objections on the part of the Seller. In such case, it seems a good idea to have an external, impartial expert calculate the final price along with all its parameters. Remember that the game is not decided until it is over.