Definition
Completion accounts are a balance sheet prepared as at the date a sale completes (closing in the US, where you may see closing accounts or a closing balance sheet). The price is agreed up front, usually on a cash-free, debt-free basis with a target level of working capital. An estimated price is paid at completion, then adjusted once the accounts show the actual cash, debt and working capital. The business's risks and rewards pass to you at completion.
Cash-free, debt-free is a pricing basis in which the headline price assumes the business changes hands with no cash and no borrowings. The seller keeps the cash, repays the debt and leaves a normal level of working capital behind.
Working capital is the money tied up in running a business day to day, mainly stock and money owed by customers, less money owed to suppliers. A sale needs to agree how much of it comes with the business.
Worked example
Wrenfield Electrical Wholesale is a fictional UK business sold for £4,000,000 on a cash-free, debt-free basis, with a working capital target of £600,000. The purchase agreement says completion accounts will be prepared within 60 days.
They show £200,000 of cash, £100,000 of debt and working capital of £550,000.
- Add £200,000 for cash.
- Deduct £100,000 for debt.
- Deduct £50,000 for the working capital shortfall.
The final price is £4,050,000.
A working capital peg is the agreed level of working capital a business must contain at completion. The price moves up or down by the difference between the actual figure and the peg.
Why buyers care
Completion accounts mean you pay for what you actually receive, which helps where the balance sheet moves a lot through the year or where the seller's records are less reliable.
They also take time and fees, and disputes are common. Many disputes come from accounting choices, such as how much to provide for bad debts or old stock. The purchase agreement should set out the accounting policies, who prepares the accounts, the timetable and how disagreements are referred to an independent accountant. Holding part of the price in escrow or as a holdback until the adjustment is settled makes any money owed to you easier to recover. A locked box is the main alternative.
Escrow is an arrangement in which an independent third party holds money until agreed conditions are met. In a business sale it keeps part of the price available to cover claims after completion.
A holdback is part of the purchase price the buyer keeps back at completion and pays later if no valid claims arise. Unlike escrow, the money stays with the buyer.