Completion Accounts Or Locked Box

Date Added 17.10.18

A Buyer of a Company will typically want a way to calculate the equity value of what they are buying.  Purchasing a Company without any way to make adjustments to the price needs careful thought, and professional consultation. There are two generally used ways of making adjustments:

Completion Accounts

Any adjustments to price are made by reference to the Company’s balance sheet as at the date of purchase, prepared after the date of purchase. Typically, an initial amount of the price is paid at Completion usually based on an estimate of the final balance sheet. Any adjustment is then made once the Completion Accounts are agreed. Any adjustments to price are usually on a pound for pound basis. The Sale Agreement will need to detail how these accounts are prepared; the accounting policies to be used; any pre-agreed basis upon which a particular asset or liability will be treated; who will prepare them; timescales for preparation and review by the other party; and how any disputes will be resolved. Typical areas of dispute may include providing for liabilities of uncertain amounts; provisions around bad debts/stock; new provisions that did not feature in the Company’s previous accounts. If the Contract has been properly drafted and professional advice taken disputes are unlikely to arise!

Locked Box

Typically, any adjustments to value are made to the Company’s balance sheet which is prepared at a date prior to completion of the purchase. The Seller will give contractual assurance to the Buyer as to the accuracy of such balance sheet, which if they turn out to be incorrect gives the Buyer the right to make a claim against the Seller for loss suffered (unlike the pound for pound adjustment under Completion Accounts). In addition, the Contract between the Buyer and Seller will prohibit money and assets being taken out of the Company for the benefit of the Seller and its connected persons from the date of the agreed balance sheet until completion. Such payments are known as “Leakage” and in circumstances where there are known payments these are allowed and termed “Permitted Leakage” – eg, payment of rent by the Company to a shareholder/shareholders pension fund. Because the balance sheet is prepared before Completion a certain amount of due diligence should be carried out on it by the Buyer.

Which method is used will depend on the particular circumstances of the deal, and it should be noted that the Completion Accounts process can be used for both share and trade/asset purchases.  In any event, professional advice should be sought at an early stage and throughout the purchase process to ensure the legal documents accurately reflect how the deal is priced and what adjustments may be made.

For further information Talk to Tollers. Partner, Matthew Crosse, has over 20 years’ experience advising those buying and selling businesses and companies, including management buy outs and private equity fundraising. You can contact Matthew on 07720 561328 or by emailing matthew.crosse@tollers.co.uk

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