Typically, a transaction is based on two common approaches either completion accounts or locked box mechanism. Both approaches deal with the business’ financial position and therefore can impact the final consideration at completion. These will consider areas such as target working capital on a cash-free, debt-free basis.
Completion accounts are prepared after the completion date and reflect the actual financial position at completion. Adjustments are made for items such as working capital, cash, and debt to ensure the agreed cash-free, debt-free basis. This method provides accuracy but can lead to post-completion negotiations and delays while the accounts are agreed.
Locked box accounts fixes the price based on a set of accounts at an agreed locked box date prior to completion. From that point, the seller undertakes that no value will leak from the business other than permitted items. This gives the buyer price certainty and avoids lengthy post-completion adjustments, but it places more risk on the buyer for changes between the locked box date and completion.
For both methods, specific accounting policies and provisions will be agreed between the parties even if statutory accounts are used. It is important to understand the business and any specific accounting policies that are applied and relevant, to ensure they are properly reflected in this mechanism – typically the accounts are prepared on a normal basis e.g. under UK GAAP under FRS102 or IFRS for larger, international focused businesses.
