The primary models of corporate entity acquisition are usually through share or asset acquisition. Various factors influence the decision to settle on either of the two. In this write-up, the focus is on acquisition through shares, as discussed below.
1. Completion Accounts
In this model, the parties initially agree on an estimated sale price and upon completion, the “completion accounts” are drawn up based on the actual figures of assets, liabilities, and working capital, to finalize the price based on how the company’s balance sheet stands as at the completion date. If the company’s financial position is stronger, the seller may receive additional money; if it is weaker, they might owe the buyer money.
The advantages of using this model include certainty of the actual value due to accurate valuation, the process may involve minimal due diligence pre completion which saves time especially for the seller who would otherwise be producing loads of documents. The disadvantages are that the procedure is more complex, the transaction takes longer, especially post-completion, and there is a likelihood of a dispute if either party questions the accuracy of the valuation.
2. Accounts Date
This typically involves the use of the company’s financial position as of a fixed date such as at the end of the company’s financial year or another mutually agreed-upon date that serves as a reference point for the financial adjustments to determine the preliminary price and the agreed upon price may be changed, informed by the actual financial position of the company as at the closing date.
The advantages of this model include better chances of a fairer and accurate price thereby providing a transparent procedure to assess the price and the true reflection of the company’s position. The disadvantages include price uncertainty due to post-closing adjustments, the process is time consuming and costly due to post-completion accounts valuation procedure, and there is potential for disputes if either party believes that the adjustments post-completion are unfair.
3. Locked Box
This is the most preferred method used in company share sales, but it operates differently from completion accounts and accounts date. In a locked box model, the price for the company is fixed and set at the start of the transaction. The key feature is that it “locks” the financial position of the company at a specific date (often the “locked box date”).
The buyer agrees to purchase the company based on its balance sheet at that date, and the price does not change, regardless of any changes in the company’s financial position between the locked box date and the completion date. Any value adjustments that happen after the locked box date are not considered.
The advantages of this model is price certainty prior to completion, smoother negotiations, fast-paced transaction and reduced transaction costs. The disadvantages are that the purchaser may opt for a detailed due diligence process because there is no chance to change figures which may take time and consume resources and the lack of price adjustments may render the purchase price lower or higher, not reflecting the precise price.
4. Tax Implications
In both completion accounts and accounts date models, there are significant tax considerations which may involve adjustments to the sale price, potentially triggering additional tax liabilities such as the capital gains tax for the seller and the stamp duty for the buyer depending on the nature of those adjustments. On the other hand, Locked Box can simplify the transaction from a tax perspective since the price is agreed upfront and there are no adjustments post-completion.
Conclusion
Each share sale model has its own advantages and disadvantages, impacting factors like price certainty, transaction speed, and potential disputes. While Locked Box is often favoured for its simplicity, certainty, and tax efficiency, Completion Accounts and Accounts Date offer more flexibility but may involve complex post-completion adjustments, potentially triggering additional tax liabilities like capital gains tax for the seller and stamp duty for the buyer. The choice of model will depend on the parties’ priorities regarding price accuracy, speed, and tax considerations.