Completion Accounts

What are completion accounts?

Completion accounts (in German, Stichtagsabschluss zum Vollzug) are financial statements drawn up as at the closing date of a company acquisition, from which the final purchase price is calculated under a contractually agreed formula. The closing date is the day on which the shares pass to the buyer and the purchase price is paid, hence also the name closing accounts. On this day, the buyer first pays a provisional purchase price based on estimated values; the difference from the final amount is settled as soon as the completion accounts have been drawn up and reviewed.

The process resembles a utilities statement: an estimated amount is paid first, and after the statement comes an additional payment or a refund. The mechanism (completion accounts mechanism) is set out in the purchase agreement and its schedules: purchase price formula, definitions of the individual items, accounting rules and usually a model calculation. Besides buyer and seller, their finance departments and advisers are involved, and, for disputes, an independent expert, usually a neutral audit firm, who determines disputed figures bindingly. The counter-model is the locked box mechanism: there the price is fixed on the basis of a balance sheet before signing, and after closing no balance sheet adjustment takes place.

The purchase price formula of completion accounts

Purchase offers generally state an enterprise value on a debt-free and cash-free basis (cash-free/debt-free). This means the value of the operating business, calculated as if the company had neither bank balances nor financial debt. Completion accounts translate this value into the price for the shares. The formula typically reads:

• agreed enterprise value
• minus financial liabilities at the reference date, such as bank loans, shareholder loans and accrued interest
• minus debt-like items, such as tax liabilities for periods before closing or outstanding bonuses
• plus freely available cash at the reference date
• plus or minus the deviation of net working capital from the agreed target value

The result of the calculation is the equity value, that is, the purchase price for the shares; the reconciliation itself is called the equity bridge. The last line ensures that the buyer receives a company with the usual level of inventories, receivables and short-term liabilities. How the target value is determined is regulated by the working capital adjustment. For asset-heavy companies, the book equity is sometimes adjusted against a target value instead of net working capital.

From provisional to final purchase price

On the closing date, nobody knows the exact reference-date values, because accounting needs weeks to close the reference date. The mechanism therefore works in two steps:

1. A few days before closing, the seller presents an estimate of the reference-date values. It gives the provisional purchase price that the buyer pays at closing. A partial amount is often retained or deposited in an escrow account to secure a later repayment.
2. After closing, the completion accounts are drawn up, often called the completion statement in the contract, usually by the buyer, who then controls the accounting. The seller reviews them and can raise objections; an independent expert decides open points. The difference between the provisional and the final purchase price is then settled.

Deadlines, rights of objection and the procedure before the independent expert are regulated by the adjustment clause of the contract (post-closing purchase price adjustment). Legally, the independent expert's decision is an expert determination (Schiedsgutachten), to which Sections 317 to 319 of the German Civil Code (BGB) apply by analogy. It binds both sides and can be challenged in court only if it is manifestly incorrect.

Some contracts value estimated net working capital for the provisional purchase price at no more than the target value. An estimate that is too optimistic then does not lead to an overpayment that the seller would later have to refund.

Accounting rules of completion accounts and their hierarchy

Completion accounts are not annual financial statements under the German Commercial Code (HGB) but accounts for a contractual purpose. The HGB leaves room for recognition and measurement choices, for example in write-downs, provisions and accruals, and whoever draws up the accounts could use them in their own favour. Purchase agreements therefore set a hierarchy (accounting hierarchy):

1. specific rules of the contract, such as fixed percentages for the write-down of overdue receivables or for inventories without stock movement
2. then the recognition and measurement methods applied in the last annual financial statements, in line with the consistency requirement of Section 246(3) and Section 252(1) no. 6 HGB
3. last, the provisions of the HGB and the generally accepted accounting principles

The contract also regulates up to when findings after the reference date are taken into account. Materiality thresholds, as are usual in an audit, are often excluded because every euro goes directly into the purchase price. A model calculation based on a current monthly closing assigns each balance sheet item to a category and prevents an item from being captured twice or not at all.

Use of completion accounts and negotiation

Completion accounts are chosen when a reliable balance sheet before signing is lacking or the company may change substantially until closing. Typical cases are the carve-out of a part of a company without its own accounts and a seasonal or fast-growing business. They also suit a long path to closing or a buyer that does not accept historical figures as the basis for the price. In the US market, adjustments after closing are the rule, and buyers from there often bring the mechanism into European negotiations.

Economically, the result passes to the buyer only at closing. What the company earns until then increases cash or reduces liabilities, and both raise the purchase price in the seller's favour. The buyer pays for what it actually receives at the reference date. In return, the final amount is not fixed until months after closing, and part of the price negotiation shifts to the period afterwards.

Negotiation therefore focuses on details: who draws up the accounts and which deadlines apply. Added to this are the seller's access to accounting and staff after closing, the amount of the retention and a possible threshold below which small deviations are disregarded.

Worked example: calculating the purchase price with completion accounts

A manufacturer of measuring technology is sold at an enterprise value of EUR 18.0 million. The target value for net working capital is EUR 4.0 million. EUR 0.5 million of the provisional purchase price is deposited in an escrow account.

• Seller's estimate at closing: financial liabilities EUR 5.0 million, debt-like items EUR 0.3 million, cash EUR 1.2 million, net working capital EUR 4.2 million
• Provisional purchase price: 18.0 minus 5.0 minus 0.3 plus 1.2 plus 0.2 deviation from target value = EUR 14.1 million; of this the seller receives EUR 13.6 million, EUR 0.5 million goes to the escrow account
• Completion accounts: financial liabilities EUR 5.05 million because accrued interest of EUR 50,000 was missing; debt-like items EUR 0.35 million because a bonus for the previous year of EUR 50,000 had not been recorded; cash EUR 1.15 million; net working capital EUR 4.0 million
• Final purchase price: 18.0 minus 5.05 minus 0.35 plus 1.15 plus 0.0 = EUR 13.75 million
• Settlement: 14.1 minus 13.75 = EUR 0.35 million in favour of the buyer; from the escrow account the buyer receives EUR 350,000, the seller EUR 150,000
• Seller's total proceeds: 13.6 plus 0.15 = EUR 13.75 million

Had the completion accounts, with all other values unchanged, shown net working capital of EUR 4.5 million, the final purchase price would be EUR 14.25 million. The buyer would have to pay EUR 150,000 more, and the escrow account would be released in full to the seller. The correction of EUR 350,000 in the base case corresponds to just under 2% of the enterprise value. Of this, EUR 200,000 is due to the lower net working capital and EUR 50,000 each to the missing interest, the missing bonus and the lower cash.

Distinctions: completion accounts, locked box and annual financial statements

• Locked box: The price is fixed before signing on the basis of a historical balance sheet, and the result from its reference date belongs to the buyer. Instead of an adjustment, a ban on value leakage protects the buyer. Accuracy is gained by the buyer with completion accounts, price certainty by the seller with the locked box.
• Working capital adjustment: a component of the completion accounts mechanism that concerns only net working capital.
• Post-closing purchase price adjustment: the procedure in which the completion accounts are reviewed and, in a dispute, determined. The completion accounts supply the figures, the procedure makes them binding.
• Annual financial statements under the HGB: the statutory accounts with balance sheet, income statement and, where applicable, notes. The completion accounts are usually limited to the items relevant to the purchase price and follow the contractual rules first.
• Earn-out: is linked to development after closing, not to the values at the reference date.

Common mistakes

• A mere reference to the HGB. Without contractual accounting rules, the preparer decides on write-downs and provisions, and the dispute shifts to the independent expert.
• No model calculation. If there is no schedule assigning each balance sheet item to a category, discussions arise after closing about items that nobody raised in the negotiation.
• Double counting. Tax liabilities or bonuses that appear both in net working capital and among the debt-like items reduce the price twice.
• Unclear reference date. Whether the reference date is at the start or the end of the closing day decides to whom the receipts of that day are attributed.
• No access after closing. Without a contractual right to inspect accounting and records, the seller cannot review the buyer's draft.
• Retention too small. If the seller has to refund, a buyer without a sufficient escrow amount is left with an unsecured payment claim.

Frequently asked questions

Who prepares the completion accounts?

Usually the buyer, because it controls the company and its accounting after closing. The seller receives a right of review and objection. Less often the seller prepares the accounts, or both sides jointly engage an audit firm.

Can the purchase price also rise through completion accounts?

Yes. If cash is above the estimate, liabilities below it or net working capital above the target value, the buyer pays more. The mechanism works in both directions, unless the contract provides for a one-sided adjustment.

How long does it take until the final purchase price is known?

Without a dispute, often three to six months after closing. For preparation, 60 to 90 days are commonly provided, followed by the seller's review period and a short settlement phase. If an independent expert has to decide, the procedure is extended by weeks or months.

Do completion accounts have to be audited by an auditor?

Not by law. Whether an audit or review takes place is determined by the contract. The parties often dispense with it, because the seller reviews the draft anyway and the independent expert settles disputed points.

Are completion accounts worthwhile in smaller company sales?

Often only in simplified form. An adjustment solely for cash and financial liabilities without a target value for net working capital is then common. In this case, conduct-of-business obligations should prevent receivables from being brought forward or payments to suppliers from being postponed before closing.

The Roemer Capital view

If a buyer insists on completion accounts, we negotiate the accounting rules with the same care as the enterprise value, because they determine what amount reaches the seller. The basis is a model calculation that we prepare with the client's finance department from the last monthly closings and include as a schedule in the draft contract.

We prepare the estimate at closing so that it withstands the later review; an estimate that is too optimistic only leads to a repayment from the escrow account. We derive the amount of the retention from the items where deviations are realistic, instead of accepting a flat percentage of the purchase price.