Completion accounts in M&A transactions – how to create certainty in uncertain times

The Snapshot

1. Since the end of the COVID-19 era of cheap money and lofty valuations, the Australian private M&A market has been a buyer’s market. This has caused a relative increase in the use of completion accounts and specifically, debt-free/cash-free and target working capital purchase price adjustments, in transaction documentation compared with locked box or other fixed price mechanisms. Completion accounts are considered a buyer-friendly approach to purchase price adjustments, providing the buyer with greater accuracy when it comes to calculating the equity value of the target group payable on completion.
2. While the aim of completion accounts is greater certainty, depending on the size and nature of the target business, completion accounts can become a complex mechanism, subject to significant negotiation and have the potential to result in disputes following completion of a transaction.
3. In this article, we examine some of the key elements of the completion accounts mechanism and the ways in which buyers and sellers alike can look to reduce the likelihood of future conflicts, eliminate ambiguity, and avoid potential pitfalls.

Completion accounts

The vast majority of private market M&A transactions now utilise completion accounts to adjust the purchase price paid on completion to reflect the final equity value of the target company or group. In our experience, fewer deals now utilise a ‘locked-box’ approach which results in a fixed purchase price subject to the sellers not breaching the ‘no leakage’ covenant.¹

The use of completion accounts is regarded as a ‘buyer-friendly’ approach, allowing the buyer some degree of certainty that the purchase price paid for the target is reflective of the actual level of debt, cash and working capital on completion. In an era of economic uncertainty and volatility, driven by global conflict and Trump’s trade war,² we suggest the use of completion accounts as the preferred purchase price mechanism in private M&A deals will continue for some time.

A completion accounts process can vary in a number of ways, but the most common approach is for the parties to agree on a headline purchase price or enterprise value of the target group, which is converted to an equity value or purchase price by deducting all debt and debt-like items of the target group and adding back all cash, each as calculated on the date of completion. The parties also agree in the documentation to a target level of working capital which the target group must have on completion, with an amount added or subtracted from the purchase price subject to whether the actual level of working capital is more or less than the agreed target level of working capital. Estimates of debt, cash and working capital are usually agreed prior to completion with the amount payable by the buyer on completion to reflect these estimates until a final adjustment is made post-completion once the final accounts for the period (ending on the completion date) can be prepared and agreed post completion.

There are some key issues in negotiating completion accounts mechanisms, which we examine in more detail below, which buyers and sellers should be aware of in order to ensure that their expectations are aligned.

The completion statement

A customary approach to share purchase agreements is to include a pro forma completion statement as a schedule to the document. This is in effect agreeing the way in which, and the form of, the final completion statement which will be prepared following completion. This allows the buyer and the seller to agree the basis and methodology on which the purchase price adjustment will be calculated prior to signing the relevant sale document.

The greater the level of detail which is included in the pro forma completion statement, the less likelihood of a dispute as to its application in the future. Pro forma completion statements often include reference account mapping, categorising existing general ledger account codes into debt, cash and working capital, as applicable. This, in tandem with the application of specific accounting principles (discussed in more detail below), provides clarity and gives transaction parties a truer sense of the final purchase price in advance of the adjustment taking place.

Estimated Adjustment Amount

Where there is likely to be any material adjustments for debt, cash or working capital, the amount paid by the buyer to the seller on completion is usually calculated by using an estimate of debt, cash and working capital (Estimated Adjustment Amount). This then allows the parties to simply adjust for the difference between the Estimated Adjustment Amount and the actual figures once they are known following completion.

Provided the Estimated Adjustment Amount is accurate, this reduces the quantum of the adjustment to be made following completion, and this in turn reduces the risk for the buyer or seller (as relevant) of non-payment. Calculating the Estimated Adjustment Amount using the pre-agreed accounting principles and the pro forma completion statement may also reduce potential conflicts, as the transaction parties will have an opportunity to scrutinise a working example of the completion statement and accounting principles in order to agree the Estimated Adjustment Amount.

Where there is likely to be any significant period between signing and completion, the sale agreement often sets out a process where the seller provides the estimated completion statement to the buyer closer to completion so that the purchase price paid on completion is as close to the actual purchase price as possible. From the seller’s perspective, they will prefer that the estimated completion statement is the statement provided by the seller. From the buyer’s perspective, they will prefer a mechanism where the buyer has the right to challenge the estimated completion statement. The drawback of this approach is that it relies on the parties agreeing to the estimated completion statement and Estimated Adjustment Amount in order to proceed to completion. One compromise is that the seller is required to consider in good faith any comments from the buyer on the estimated completion statement, or the parties agree in the document to a ‘fallback’ Estimated Adjustment Amount to remove any possibility of the Estimated Adjustment amount being deemed an ‘agreement to agree’ and therefore resulting in a significant risk of dispute or the buyer using it as a means of paying less for the business on completion.

Accounting principles

Beyond the form of the completion statement itself, the parties should also agree and set out in the sale agreement a set of accounting principles on which both the estimated completion statement and final completion statement are to be prepared. Where there is some conflict between these principles, the sale agreement will also set out the order of precedence in which they are to be applied.

While agreed accounting principles can vary, a customary approach to this hierarchy would be to apply:

(a) first, any specific principles, policies and procedures which are agreed between buyer and seller and set out in the sale document itself;

The specific accounting policies may include general items such as no double counting of assets or liabilities or specifying the currency as being in Australian dollars, to more deal specific policies which are unique to the target business or otherwise expressly negotiated by the parties.

(b) second, where an item is not covered by the specific accounting principles, in a manner consistent with the principles, policies and procedures used to prepare the most recent annual accounts;

This limb is particularly important where a significant period of time will pass between the date of completion and when the completion accounts statement is prepared, or in the context of an earn-out which applies the same principles to an earn-out statement (discussed in more detail below). Referencing historical accounts will ensure that the purchase price adjustment is made on a like-for-like basis. If there have been changes in accounting standards or the target group has moved from special purpose accounts to general purpose accounts, it will be critical that the final completion accounts are prepared on the same basis as the estimated completion statement was prepared.

(c) finally, where an item is not covered by (a) or (b) above, in accordance with the accounting standards which prevail at the relevant time.

The application of this limb is rare but is used as a catch-all and provides transaction parties with a path forward in circumstances where a certain item has not historically been accounted for by the target business.

We often see that the more items which are determined by reference to the initial limbs of this hierarchy, the less likely a dispute is between the parties. This is because the lower end of the hierarchy allows the relevant party to use a greater level of judgement in the item’s application.

It is critical that the order of precedence in which these principles are to be applied is clearly articulated.

Earn-outs

Although not directly related to completion accounts, where a transaction involves an earn-out, the earn-out amount is typically calculated based on accounts prepared in accordance with the same accounting principles as adopted for the purposes of the completion accounts, with some differences in the specific policies to be applied as an earn-out is usually based on profit and/or revenue which are P&L items rather than balance sheet items. Compared with the adjustment contemplated by the completion accounts, which usually takes place within a few months of completion, an earn-out often takes into account financial metrics much later, even years after the completion date.

What is important in these circumstances is that the accounting principles applied in preparation of accounts for the purposes of calculating the achievement of an earn-out are consistent with the accounts of the company used for the purposes of calculating the purchase price. An example of the importance of this issue is where the legal status of the target company changes following completion, resulting in the standard of the accounts changing from unaudited to audited (for example, where a company transitions from a small proprietary company to a large proprietary company in accordance with the Corporations Act 2001 (Cth)).

This change in standard may result in different accounting treatment for certain items, including revenue recognition principles. This can materially affect revenue and earnings in the relevant reporting period, and therefore affect whether an earn-out is achieved.

Key takeaways

While completion accounts are often utilised to facilitate maximum transparency and certainty in a transaction, they can prove to be far from certain if they are not carefully drafted in a sale agreement. These purchase price adjustments can be complex and require a deep understanding of not only the key drivers and inputs, but also of the business of the target company to ensure the value the parties intend on capturing is properly accounted for.

For more information, please contact Peter Williams, Benny Sham or Julian Ilett.

¹In Hamilton Locke’s report, ‘M&A Report: 2024 year in review and future outlook’, published 26 March 2025, we observed that while 60% of transactions reviewed contained adjustment mechanisms, only 2.5% of those transactions contained a locked box mechanism. (https://hamiltonlocke.com.au/ma-report-2024-year-in-review-and-future-outlook/).

²See our recent article, https://hamiltonlocke.com.au/your-guide-to-material-adverse-change-clauses-amidst-current-economic-headwinds/