When a company is sold, the purchase price paid is often adjusted after the event to take account of various fluctuating assets and liabilities of the company, for example how much cash is in the company’s bank account, how far the company is into any overdraft facilities and the company’s tax liabilities (‘the Variables’). The parties will probably have negotiated the purchase price based on a valuation of the company’s goodwill, property and assets and on the basis of ‘ball park’ figures for the values of the Variables.
The precise values of the Variables and thus the true value of the company when the sale goes through (‘Completion’) cannot be worked out until after the event and the Share Sale Agreement will usually contain a mechanism for adjusting the purchase price based on Completion Accounts. The Completion Accounts is essentially the balance sheet of the Company at the time of Completion and will include precise values for the Variables and will be drawn up by the Buyer’s accountants shortly after Completion (usually around 7 days’ afterwards).
If the Share Sale Agreement were to say nothing at all in respect of the Variables, either seller or buyer could end up with a pleasant or very unpleasant surprise. The difficulty is that nobody knows who will win and who will lose and so it is quite a gamble!
We always recommend going back to the basis on which the deal was originally agreed, identifying whether it took account the Variables and subject to that, carefully considering the Completion Accounts mechanism for adjusting the purchase price in the Share Sale Agreement with the accountant of the party in question. In this way there should be no surprises and if the company is “worth” less than was originally thought, there should be a refund. If the company is “worth” more, then the buyer should pay more for it.