Understanding Completion Accounts: A Guide for SME Owners
When selling an SME, one of the most complex parts of the transaction is the adjustment of the purchase price at completion. While a headline price may be agreed early on, the final amount paid often depends on completion accounts. For many owner-managers, this is an unfamiliar process that can create surprises if not properly understood.
What Are Completion Accounts
Completion accounts are financial statements prepared as of the completion date. They typically cover the balance sheet, profit and loss, and cash flow at the point of transfer. Their purpose is to confirm the actual financial position of the business when the buyer takes ownership, ensuring that the price reflects the reality on the ground.
Why Completion Accounts Matter
The completion accounts mechanism protects buyers against changes in the financial position between the deal being agreed and the transaction completing. If working capital is lower than expected or debt levels are higher, the purchase price may be adjusted down. Equally, if the business is stronger than expected, the seller may benefit from an upward adjustment.
Common Areas of Dispute
Working capital is the most common area of disagreement. Buyers and sellers may have different views of what constitutes “normal” working capital and which items should be included. Debt-like items, such as tax liabilities or leases, can also cause disputes if not clearly defined in the sale agreement. Ambiguity at this stage can lead to lengthy negotiations or even legal proceedings.
How to Prepare as a Seller
To avoid disputes, SME owners should start preparing well before entering a sale process. Key steps include reviewing historic working capital trends, agreeing clear definitions of debt and debt-like items, ensuring accurate and timely management accounts, and taking advice on how completion accounts are likely to be prepared. Proactive preparation reduces the risk of last-minute price reductions and helps protect overall deal value.
Final Thoughts
Completion accounts can significantly affect the final proceeds of a sale. For SME owners, understanding how they work and preparing accordingly is essential. With the right advice, disputes can be minimised and you can enter negotiations with confidence.
