Value in Completion Accounts
24 February 2017
Between 40% and 60% of M&A transactions have a completion accounts mechanism, adjusting the purchase price after completion to reflect the actual cash, debt and net working capital of the Target at Closing. Seasoned deal doers know that value can be won or lost through the completion accounts process. But, often, it is a bit of an afterthought, or considered to be a mechanical process that gets little attention from senior stakeholders.
Our recent survey shows that anywhere between 1% and 20% of the headline price is adjusted through completion accounts. Focusing on them, both pre and post signing of the Sale and Purchase agreements (“SPA”) pays dividends. When done well, completion accounts protect or enhance deal value. Where they are not, at best money is left on the table, at worst they lead to costly and protracted disputes that get attention for all the wrong reasons.
Completion accounts adjustments average 2% to 3% of headline price
We have analysed key trends in the completion accounts processes based on those we have advised on in the past five years; both in terms of the value and types of adjustments made to price.
On average, 7% of the headline price of a deal is adjusted as a result of the completion account mechanism. This reflects a number of cases where the adjustment amount exceeded 20% of headline price. Excluding these outliers, the average value of completion account adjustment is 2-3% of headline price. The absolute value of adjustments ranges from tens of thousands to hundreds of millions.
Common adjustments relate to unrecorded liabilities, provisions, and errors
In a typical completion accounts process, one party prepares a set of accounts and the other party reviews and, if necessary, raises a dispute notice which sets out the balances that are disputed.
In an overwhelming majority of cases (64%), disputed items related to unrecorded or incomplete liabilities. This is most often due to them not being accrued properly in the completion accounts or as a result of post balance sheet events.
Other common types of adjustments are those which are judgmental in nature for example, general, bad debt and inventory provisions. There is often a lack of definition or clarity regarding these items in SPA’s resulting in differing interpretations and dispute between Buyer and Seller.
Although inventory valuation and provisioning adjustments are identified across all industries, they are seen most often where the Target operates in the industrial products industry, where inventory adjustments were identified in over 75% of cases.
A third of the transactions in our sample completed and required completion accounts to be prepared mid-month (37%). A key issue arising in these cases is the accuracy of the numbers. The occurrence of errors doubles in mid-month completion accounts versus month-end, often a reflection of the fact that accounting systems and processes are not set up for mid-month reporting.
Top tips for maximising value through the completion accounts:
- Get the SPA right: the completion accounts policies are fundamental in any completion accounts process. Poorly drafted SPA clauses lead to significant value erosion and disputes.
- As a Seller, make sure, before you lose control of the business, that you have a good understanding and documentation of judgements made in the run up to Closing so that you can protect against changes of view by management post-Closing.
- As a Buyer, the completion accounts present an opportunity to have another look at the business (especially where access through diligence was limited) and pay no more than you need to. However, the completion accounts are not a free for all to renegotiate the deal and care is needed to make sure that adjustments identified can stand the scrutiny of Seller review, and, where negotiations fail, an Independent Expert.
If you would like to know more about completion accounts or to discuss any of the issues raised in this article please get in touch.