Contact Us
  • 01530 416688
  • Elsmore House, 14a The Green, Ashby de la Zouch, Leicestershire, LE65 1JU
  • Request a call back
  • 01296 381011
  • Unit 11 Bell Business Park, Smeaton Close, Aylesbury, HP19 8JR
  • Request a call back
  • 01543 503846
  • Rumer Hill Business Estate, Rumer Hill Road, Cannock, WS11 0ET
  • Request a call back
  • 024 7625 8621
  • 3Mc Middlemarch Business Park, Siskin Drive, Coventry, CV3 4FJ
  • Request a call back
  • 01388 762478
  • Gladstone House, Gladstone Street, Crook, County Durham, DL15 9ED
  • Request a call back
  • 01332 360808
  • 10-11 St. James Court, Friar Gate, Derby, Derbyshire, DE1 1BT
  • Request a call back
  • 0191 517 0116
  • 49 Front Street, Framwellgate Moor, Durham, County Durham, DH1 5BL
  • Request a call back
  • 01453 542483
  • Prospect House, 5 May Lane, Dursley, Gloucestershire, GL11 4JH
  • Request a call back
  • 01452 335800
  • 5 Pullman Court, Great Western Road, Gloucester, Gloucestershire, GL1 3ND
  • Request a call back
  • 0191 517 0116
  • Stephenson House, Richard Street, Hetton-le-Hole, Tyne & Wear, DH5 9HW
  • Request a call back
  • 01926 451100
  • 1 Pegasus House, Pegasus Court, Tachbrook Park, Leamington Spa, Warks, CV34 6LW
  • Request a call back
  • 01332 862259
  • Bank Chambers, Market Place, Melbourne, Derby, Derbyshire, DE73 8DS
  • Request a call back
  • 0115 922 8873
  • 32 Eldon Road, Beeston, Nottingham, Nottinghamshire, NG9 6DZ
  • Request a call back
  • 0191 411 2468
  • Rowlands House, Portobello Road, Birtley, Chester Le Street, County Durham, DH3 2RY
  • Request a call back
  • 01769 572404
  • Lime Court, Pathfields Business Park, South Molton, Devon EX36 3LH
  • Request a call back
  • 01384 370060
  • 1st Floor, Copthall House, 1 New Road, Stourbridge, West Midlands, DY8 1PH
  • Request a call back
  • 01952 505896
  • Bank House, 66 High Street Dawley, Telford, Shropshire, TF4 2HD
  • Request a call back
  • 01922 611567
  • Churchill House, 59 Lichfield Street, Walsall, West Midlands, WS4 2BX
  • Request a call back
  • 01902 456115
  • St David's Court, Union Street, Wolverhampton, West Midlands, WV1 3JE
  • Request a call back
  • 01905 748400
  • Richmond House, 48 Bromyard Road, Worcester, Worcestershire, WR2 5BT
  • Request a call back
  • 01642 221 331
  • Wynyard Park House, Wynyard Avenue, Wynyard, Billingham, TS22 5TB
  • Request a call back

Keeping the price right – avoiding the post – deal pitfalls

Keeping the price right – avoiding the post – deal pitfalls

Posted by David Owens

 Even with the best advisors, buying or selling a business can be a fraught experience for all involved as completion day looms. With a seemingly endless list of last minute issues to deal with, there is one fundamental area that experience suggests can be overlooked as the pressure mounts to get the deal over the line – and that is the thorny issue of the post-completion price adjustment mechanism, either in the form of completion accounts or an earn-out.

What are completion accounts and earn outs?

A buyer will usually look to remove any element of risk involved in the transaction by making at least some of the consideration contingent on achieving an agreed target for either net assets at completion (as shown in a set of completion accounts) or profits achieved over an agreed period after completion (an earn out). If net assets or profits are higher than the target, then this can result in additional payments to the seller. The ‘rules’ for the calculation of either a completion account balance sheet or a profit and loss account for an earn out must be set out in the Share Purchase Agreement (“SPA”); having the properly considered clauses in this document will reduce the risk of dispute and a loss of value after the deal has completed.

What are the potential pitfalls?

Think carefully about who is best placed to prepare the accounts, and conversely which party is better to reserve its rights to review and challenge. Sellers often think they have to prepare to maintain control. However, if the accounts department is now employed by the buyer, how can they get reliable information to enable them to do that? The accounting rules to be applied also need careful consideration. Woolly drafting around ‘consistent with previous accounting policies’ or ‘generally accepted accounting policies’ (“GAAP”) are a potential cause of uncertainty and dispute. Parties need to be clear about whether consistency or GAAP should apply if a previous accounting policy is shown to be non-GAAP compliant. Parties also need to be clear about what consistency means – does it mean the application of the same high level accounting policies, or the same detailed approach to the interpretation of the high level policy? When disputes do arise, they are often referred to an independent accountant to act as ‘expert determiner’. This can be a protracted process, unless the parties agree a realistic process and timetable for the appointment of an expert and the provision of submissions and information. Sellers should consider in particular a cut-off period on the use of hindsight that can be used to support arguments and adjustments proposed by the buyer. Otherwise, events occurring months, or even years, after the completion date could be used by the buyer to change the price.

Facebook
Google+
https://www.baldwinsaccountants.co.uk/news-and-insights/insights/keeping-the-price-right-avoiding-the-post-deal-pitfalls
Twitter
LinkedIn