Purchase Price Adjustments and Completion Accounts
You may have been presented with an offer to sell your business for a headline purchase price, but the offer includes adjustments to that price.
That purchase price may be adjusted through a completion accounts exercise – accounts prepared after completion for your business as it stood at the point of the sale.
Example purchase price adjustments are outlined below, together with some information for you to consider whether a completion accounts deal is right for you.
What is a Cash-Free/Debt-Free Adjustment?
The headline purchase price is agreed in advance but excludes the business’ cash and debt. Any surplus cash of the business is then added to, and any outstanding debt is deducted from, the purchase price through the completion accounts exercise.
What is a Working Capital Adjustment?
A target working capital figure is agreed, reflecting the amount the buyer needs to run the business in the coming months. The parties look to leave this in the business at completion.
Completion accounts are prepared to determine the actual working capital at the point of sale. Any excess over the target working capital is added to the purchase price, while any shortfall would be deducted.
What is a Net Assets Adjustment?
As part of the offer, a target net asset figure is agreed. The purchase price is adjusted through the completion accounts exercise depending on whether the net assets at the point of sale are higher or lower than the target.
How Does a Completion Accounts Adjustment Work?
These adjustments require a specific procedure to be set out in the main purchase agreement. This should establish things such as:
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What is included in the calculation and what isn’t (i.e. are there any specific assets of the Company which shouldn’t be taken into account)?
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How the completion accounts are to be prepared. Who is going to prepare the first draft, will this be your accountant or the buyer’s?
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The procedure for agreeing completion accounts. If there are any disputes how are they resolved?
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Once adjustments have been resolved, when will you receive payment?
It could take a significant amount of time to agree the completion accounts and the final settlement. You may be uncomfortable with a large amount of the total purchase price remaining outstanding for that time. It may be that you consider requesting an estimate of the Surplus Cash or Net Assets to be paid at completion on account of the purchase price.
Including a completion accounts adjustment can add time and complexity to a deal and could increase your costs. This is especially true if there are extended negotiations over their terms. Thought should be given to this at the outset.
How Will It Affect My Payment?
This will depend on the outcome of the completion accounts exercise. It may be that the adjustment is a big positive for you. On the other hand, your company may have significant debts and the adjustment may look to take that into account.
It would be prudent to have a rough idea of how any price adjustment may affect your overall payment before getting too far down the line.
How Lawson West Can Help
At Lawson West, we understand that selling your business is a major decision and the result of many years of hard work. The process is much easier when you have an experienced partner advising you and helping you overcome obstacles along the way.
Our approach is to provide comprehensive support and guidance throughout the transaction. We look to make sure that any sale agreement is fair, proportionate and suitable to the deal you have negotiated. We work with you and your other advisers so that you can confidently proceed with your business sale and look to achieve a successful outcome.
If you are selling your business soon and need support through the complex process, please contact us on telephone 0116 212 1000 or 01858 445 480, alternatively complete the free Contact Us form and we will get in touch as soon as possible.
You can Contact Us in the strictest confidence, ask for Rob Flannagan
