M&A through Completion Accounts

Garden Party - Beppe Devalle

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Regarding M&A transactions there are several systems of fixing the price, and with previous entry “Locked Box o precio cerrado en compraventas de empresa”, we already saw the upward trend of using the fixed priced method.

Despite this, the system of setting the price through the Completion Accounts is still very common in M&A practice.

The Completion Accounts approach is located between the Locked Box system and the variable price system, as the purpose of the parties is to set a price on the signing date, giving the chance to the purchaser to review the situation of the company (its annual accounts), to confirm the correction of the price or modify it up or down. On the other hand, other methods of setting a variable price do not include a provisional price at the signing, but just a provisional payment of an estimated amount that is not intended to be a final price.

Through the Completion Accounts the seller calculates the estimated price based on the annual accounts and other financial statements of the company, following the method agreed by the parties. After the signing, the purchaser has certain period of time to review the company’s annual accounts and the rest of the financial statements provided, in order to verify that they are correct. In case the purchaser agrees with the financial information provided the estimated price becomes the final price, but if the purchaser finds discrepancies a price amendment is communicated. In this case the seller may oppose or accept the price amendment.  In consequence, in this case it is very important: (i) to regulate with a detailed and clear wording of the purchase agreement (SPA) the formulas to follow for the verification of the purchaser and (ii) the procedure to be followed in case of discrepancy, which usually includes a external auditor.

While the Locked Box implies, as a general rule, that the negotiations become more complex but the SPA drafting easier, the Completion Accounts facilitates the achievement of an agreement between the parties but makes the SPA more complex.