Completion Accounts Process: How Financial Due Diligence Supports Post-Close Adjustments

Completion accounts are the mechanism by which the final purchase price is determined after closing. In most M&A transactions using a completion accounts approach, the buyer pays an estimated purchase price at closing and then prepares detailed financial statements as of the closing date. The difference between the estimated and actual figures is settled through a post-close adjustment.

This process is one of the most contentious aspects of M&A execution. Disputes over completion accounts are common and can result in significant value transfers between buyer and seller.

How Completion Accounts Work

The typical process follows this sequence:

Pre-close. The SPA defines the components of the purchase price adjustment: typically net debt, working capital, and sometimes cash or other specific items. It specifies the accounting policies to be used, the target working capital level (the peg), and the process for preparing and resolving the completion accounts.

At closing. The buyer pays the estimated purchase price based on the seller's estimate of net debt and working capital.

Post-close (typically 60-90 days). The buyer prepares the completion accounts: a balance sheet as of the closing date prepared in accordance with the SPA-specified accounting policies. The buyer calculates actual net debt, actual working capital, and the resulting adjustment.

Review period. The seller reviews the completion accounts and raises objections to specific items.

Resolution. Disputed items are resolved through negotiation or, if agreement cannot be reached, through an independent expert or arbitration process defined in the SPA.

Where Due Diligence Fits

The financial due diligence performed before closing directly shapes the completion accounts process:

Setting the working capital peg. The diligence team's net working capital analysis establishes the normalized working capital level that becomes the reference point. If the NWC peg is set incorrectly, the completion accounts adjustment systematically benefits one party.

Defining accounting policies. The SPA should specify the accounting policies used for the completion accounts. The diligence team identifies areas where the target's accounting policies are unusual, inconsistent, or materially different from the buyer's policies. These policy differences must be addressed in the SPA to avoid ambiguity in the completion accounts.

Identifying classification boundaries. The boundary between net debt, working capital, and excluded items is defined during diligence. Items that fall on the boundary (accrued bonuses, deferred revenue, capital expenditure payables) must be clearly allocated to one category to prevent double-counting or gaps.

Building the baseline. The diligence team's detailed balance sheet quality review creates the analytical framework that the completion accounts will follow. The same line-by-line analysis performed during diligence must be repeated as of the closing date.

Common Disputes

Completion accounts disputes typically arise from:

Accounting policy differences. The SPA specifies that completion accounts should be prepared on a basis consistent with the target's historical policies. But if those policies involve significant judgment (provision levels, revenue recognition timing, accrual completeness), the buyer and seller may disagree on the correct application.

Inventory valuation. Physical counts at closing often reveal discrepancies from book values. The count process, valuation methodology, and treatment of slow-moving or obsolete stock are frequent dispute areas.

Receivable collectibility. The buyer may argue that certain receivables outstanding at closing are not collectible, requiring a provision that reduces working capital.

Accrual completeness. The buyer typically argues for higher accruals at closing (which reduces working capital and the purchase price). The seller pushes for lower accruals. The diligence team's historical accrual analysis provides the benchmark for reasonable levels.

Cut-off issues. Revenue and expense transactions near the closing date must be allocated to the correct period. Late invoices, early deliveries, and transactions in transit create cut-off disputes.

Best Practices for Diligence Teams

To prepare for a smooth completion accounts process:

Document everything. The diligence team's working papers become the reference point for completion accounts preparation. Clear documentation of methodologies, data sources, and analytical conclusions reduces ambiguity. Following rigorous audit trail practices during diligence pays dividends in the completion accounts process.

Define terms precisely. Work with legal counsel to ensure the SPA definitions of net debt, working capital, and excluded items are unambiguous. Every material balance sheet line should be clearly allocated to one category.

Address known issues. If the diligence identified accounting policy issues, provision inadequacies, or classification questions, resolve them in the SPA rather than leaving them for the completion accounts process.

Prepare for the closing balance sheet. Plan the closing date procedures (physical counts, bank confirmations, cut-off procedures) before closing. Delays in obtaining closing-date data delay the completion accounts and extend uncertainty.

Completion Accounts vs Locked Box

The completion accounts approach is one of two common purchase price adjustment mechanisms. The alternative, the locked box mechanism, takes a different approach by fixing the price based on a pre-close balance sheet date and prohibiting value extraction between that date and closing.

The choice between mechanisms depends on deal dynamics, negotiating position, and the complexity of the business. The diligence team's analysis supports both approaches but with different emphasis: completion accounts focus on establishing methodology and reference points, while locked box focuses on verification of the locked box balance sheet and monitoring of the no-leakage period.

Process Efficiency

Completion accounts preparation is data-intensive. The buyer must reconstruct a complete balance sheet as of the closing date, often from a target whose finance team may be less cooperative post-close.

Teams that built a clean data foundation during diligence using standardized workflows can repurpose their analytical framework for the completion accounts. The same mapping rules, validation checks, and analytical structures used during diligence apply to the closing-date balance sheet, significantly reducing the effort required for the post-close process.