When acquiring the share capital of a target company (the "Target") through a share purchase agreement, the purchase price payable may well be arrived at by reference to the Target's net asset value ("NAV") as at completion.

In these circumstances, the share purchase agreement (“SPA“) will often contain provisions setting out how the NAV is to be calculated.

Typically, a separate “completion accounts” schedule will be contained within the SPA defining how particular variable assets such as stock, work-in-progress and debtors etc, are to be valued.  The ultimate price is usually adjusted, up or down, dependent on what the aggregate values of those assets are.

Completion accounts are the cause of much negotiation between the seller and buyer and it is vital to get the drafting right.  Completion accounts are usually prepared in draft by either the buyer’s or the seller’s accountants and are then submitted for review to the other side.  In the event that the parties cannot agree a settlement, reference in the SPA is often made to the Institute of Chartered Accountants for England and Wales as the ultimate valuer.

There is no requirement for completion accounts to be audited as this leads to a significant increase in both cost and time.  An unaudited completion balance sheet is usually sufficient.

Issues over which the parties may have a disagreement on value are often:

  • Stock, including out of date, slow-moving or damaged stock;
  • Potentially unbillable work-in-progress; and
  • Overdue or potentially uncollectible debtors.

In circumstances when a NAV adjustment is included within the terms of the transaction, it would be usual for the buyer to pay a proportion of the purchase price to the seller on completion, and to pay the estimated balancing sum into an “escrow account”, which is usually a joint bank account opened by the solicitors for the buyer and the seller.  Instructions are usually given for the release of this sum to the seller, with any adjustment back to the buyer, when the NAV has finally been calculated.

It is vital that clients and their solicitors take great care in negotiating the basis on which completion account terms are to be prepared.

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

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