Closing Accounts
Closing accounts is a purchase price mechanism under which a balance sheet is drawn up as at the completion date. Net debt and working capital are measured at that date and compared with agreed reference figures. The difference adjusts the price after completion, usually within 60 to 90 days.
Under closing accounts – completion accounts in British usage – the purchase price is only finally determined after completion. One party, usually the buyer, draws up a balance sheet as at the completion date. From it, net debt and working capital are derived and compared with the reference figures agreed in the contract.
The calculation
The starting point is the negotiated enterprise value. Actual net debt at the completion date is deducted. To that is added the deviation of actual working capital from the agreed reference, the working capital target. Where working capital exceeds the target the price rises; where it falls short the price falls. Anyone accepting that target without having calculated the seasonality of the last three years routinely gives money away.
The process after completion
- preparation of the completion balance sheet by the party named in the contract, usually within 45 to 60 days
- a review period for the other side, as a rule 30 days, with rights of access to documents and working papers
- a period for agreeing disputed items
- determination by an independent accountant acting as expert where no agreement is reached
Where the disputes are
The most common point of contention is not the number but the rule behind it: on what basis is the completion balance sheet prepared? The usual answer is a hierarchy written into the contract – first the accounting rules expressly agreed, then the company's existing accounting practice, and only then the general accounting framework. Without that order, provisions, impairments and accruals become almost freely negotiable.
When closing accounts make sense
Whenever the balance sheet at a historic date is not robust enough to set a fixed price on: in a carve-out, after a system change, where working capital swings widely, or where many months separate signing and completion. The price is effort and uncertainty after the deal – and a process that ties up finance capacity in exactly the weeks when integration begins.
What belongs in the preparation
A seller entering a closing accounts process should have three things in hand before signing: their own calculation of the working capital target across at least 24 month-ends, a complete list of the items that are to count as net debt, and the ability to produce an interim close at any given date. All three are part of exit readiness.