The mechanisms of financial statement accounts play an important role in determining the final price to be paid for companies. The use of closed boxes has increased in some markets over the past 10 to 15 years, but final accounts remain commonplace, particularly outside Europe, which is a feature of private AM transactions that dealers and consultants should keep in their toolboxes. Acquisition Accounts: Typical approach and preparation base Cash-free/debt-free adjustment: the buyer and seller agree on a business value for the target company prior to the conclusion of the acquisition agreement (which value excludes funds and liabilities from the target entity). After closing, accounts are established to determine the amount of cash and debt in the target entity after closing. A total price of the target shares is then determined by adding the amount of cash to the value of the company and deducting any liabilities. The G.S.O.`s text with respect to the accounting process and, where appropriate, specific accounting and valuation methods depends in part on the findings of the diligence and the work done to understand the balance sheet and financial reporting process. In addition, there are some general considerations to ensure that the final accounts process is clearly formulated, including: In the post-completion period, the buyer and seller prepare and verify the proposed financial statement account and agree on the final price of equity to be paid for the business. From a practical point of view, there are many considerations that are specific to the individual circumstances and requirements of the G.S.O. Below you will find some of the common themes we see on many transactions. Working capital adjustment: This implies that the purchaser pays or repays, at the end of the target business, working capital above or below the agreed ”normal” level of working capital.
In a typical accrual accounting mechanism, CSM buyers and sellers agree on the value of the business to be paid for the business, as well as the magnitude of the adjustments to be made to determine the price paid for equity and the methods to be followed to determine the relevant values of these adjustments. Although a dispute resolution procedure is generally included in these provisions, it is generally costly and time-consuming. It is therefore much better to ensure that everyone fully understands (and approves!) the accounts provisions from the outset. As with so many other business transactions, a sting in new time saves! Net asset adjustment: this includes determining the net inventory value of the target entity at the end of the financial statements (i.e. deducting the total liabilities of the target entity from its aggregate assets). The final accounts are based on an agreed methodology defined in the sales contract. With respect to share purchases, they are generally used (i) to confirm whether the financial situation of the target entity corresponds to the position in the financial statements on which the purchaser based his initial valuation of the target entity and/or (ii) to test certain assumptions that the buyer may have made to calculate the purchase price – the buyer may, for example, have accepted a certain amount of net assets or operating capital. In terms of asset acquisition, they are simply used to determine the true value of the assets acquired. Important Reflections Specific Strategies for Implementing Accounting Methods at the Time of Reference Accounts Given the prevalence of blocked boxes in Europe, some deal-doer (and consultants) have less experience in account transactions.
However, given the likely importance of the final accounts, it is important that the parties involved understand the process and the risks and rewards associated with it. Why does it matter? The final account process can earn or lose a significant value.