When there is a sale of shares or assets, the buyer and seller will generally agree a headline purchase price following a valuation exercise based on historic financial records. However, this does not always reflect the value of the business as at the purchase date.
The purchase agreement will frequently contain a provision to determine the actual value on the completion date and adjust the price accordingly. This process involves the preparation of completion accounts after the business has been transferred.
In theory, this is a simple accounting exercise whereby a financial snapshot of the business is prepared based on agreed principles set out in the sale agreement. When it goes right, it can be dealt with amicably through dialogue by the parties’ accountants.
However, there are a number of ways in which the process goes wrong.
The purchase agreement will set out a timescale in which the completion accounts must be prepared, and will sometimes give a limited window to object to them before they are deemed agreed.
In practice, deadlines are often missed by both sides – particularly as it is not always clear who is taking responsibility for the timelines. This can leave grey areas.
There is often disagreement between the buyer and seller as to what the accounts should contain. Generally, the purchase agreement will specify that an expert is to be appointed to determine disputes, which should be a quicker and easier way than proceeding through court. However, this can be a daunting process which will require both accounting and legal input.
Sometimes, one side or the other may simply refuse to engage – this may be because it gets overlooked or because they do not like the idea of having to hand over money at the end of the process. It may be necessary to refer the matter to the court if one side doesn’t agree to the instruction of the expert.
We also see occasions when one side raises allegations of breach of the sale agreement to avoid the adjustment of the purchase price under the completion accounts. This will require a very careful analysis of the legal position.
Although completion accounts should be straightforward, they are often the basis for a significant dispute and should therefore be regarded as a key part of the transaction process, rather than a postscript. It may not be possible to avoid a dispute, but you can put yourself in the best position by ensuring that you fully understand the process, actively manage it and seek early legal advice in relation to any potential disputes.