Completion Accounts – The Risks
According to PriceWaterhouseCoopers (“PWC”), between 40% and 60% of M&A transactions have a completion accounts mechanism, whereby the purchase price is arrived at by reference to the Target’s net asset value (“NAV”) as at completion. The purchase price is adjusted after completion to reflect the actual net assets of the Target at the closing date.
The SPA will document how NAV is calculated. Typically, a separate “completion accounts” schedule in the SPA defines how the accounts are prepared. The ultimate price is adjusted dependent on the agreed NAV at completion.
A PWC survey (on their own advised deals) showed that between 1% and 20% of the headline price is adjusted through completion accounts. The average was 3%, ignoring outliers (other statistics are from this survey).
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 64% of cases, 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 judgemental for example, general, bad debt and inventory provisions. There is often a lack of definition or clarity regarding these items in the SPA.
Although inventory valuation and provisioning are contentious 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.
37% of the transactions required completion accounts to be prepared mid-month. A key issue is the accuracy of the numbers. The occurrence of errors doubles in mid-month completion accounts versus month-end, because accounting systems and processes are not set up for mid-month reporting.