FD Intelligence

Completion mechanisms and Sale & Purchase Agreements

A new guideline for achieving best practice in completion mechanisms and Sale & Purchase Agreements (SPA).

An active deal environment is a vital ingredient for a vibrant economy and an essential growth driver for many businesses. At the heart of every deal is a SPA that defines both the terms of the transaction and the basis for deriving a purchase consideration, and price adjustment mechanism on which the seller and purchaser both agree.

However, with the “equity value” of a business often substantially different to the "enterprise value" initially agreed, completion mechanisms can often become complex and subjective.  

Recognising the lack of guidance in this area, the SPA Advisory team at Grant Thornton UK issued a best practice guideline in October 2016 in association with the Corporate Finance Faculty of the ICAEW: Completion Mechanisms – determining the final equity value in transactions

This publication addresses the core principles behind equity value adjustments and mechanisms, demystifying the completion process for the main parties involved and demonstrating the practical value that specialist practitioners bring when completing a deal.

The principle areas considered are:

  • the key concepts of enterprise value and equity value adjustments including cash, debt and normalised working capital
  • the core principles of the two widely accepted mechanisms by which to adjust the price, namely: completion accounts and locked box. 

Whilst considering the more contentious and complex value-impacting items, and factors to consider in reaching agreement on them, the guide also deals with the implicitly commercial nature of equity adjustments that means an exhaustive set of rules covering every circumstance is not possible.

More information on the guideline is available online.

Identifying market practice for equity value adjustments – survey

In addition to setting out best practice guidance, the SPA Advisory team at Grant Thornton UK has also undertaken a survey to identify market practice in relation to equity value adjustments.  Our research, conducted in partnership with consultancy Meridian West, draws on the collective experience of over 150 deal experts, who between them have conducted thousands of deals.

The following was considered:

  • How should certain value adjusting items be treated?
  • What kind of pricing mechanism should be used?
  • On which areas of the deal negotiation should management focus their time and attention?
  • What are the common areas of disagreement and dispute post deal and how to avoid them?

Whilst the answers will vary according to the specifics of the deal, the impact of these questions is not academic, and will often have a significant real pound impact on the value of the deal, with up to 10% of the headline price regularly being contested because of disagreement about what constitutes market practice.

Our research reveals a number of  findings:

  • Locked boxes are becoming increasingly popular with nearly three quarters of respondents reporting that the use of locked box mechanisms has increased over the past 5 years
  • Deferred income, normalised working capital, treatment and definition of cash are some of the most highly contentious value items discussed in deal negotiations
  • Completion account mechanisms,  despite being a highly negotiated area, lead to more disputes than locked box mechanisms
  • Earn outs are prevalent and becoming more common

There is clearly a significant appetite for greater harmonisation and standardisation in how SPAs are compiled. The research also indicated that there is consensus in the market that a lack of identifiable market practice slows down deals and may lead to unnecessarily protracted negotiations and even costly or preventable disputes post-completion.

At Grant Thornton UK we believe there is a smarter way to get deals done, in which both parties can take fair and equitable starting positions that will see the interests of both parties protected. This smarter way enables advisers and management to concentrate their efforts on resolving the genuine commercial issues and avoid disagreement on process-type issues, and hence close deals faster and more amicably.  

More information on the survey is available online.

About Grant Thornton UK’s SPA advisory team

Our team combines completion mechanism adjustment and dispute specialists to help principals and advisers to reach an agreement on the SPA that protects real £ value, whilst reducing the risk of disputes. Grant Thornton offers clients this specialised expertise, for both domestic and cross-border transactions, across a full range of sectors.

We are the only integrated specialist SPA team with a focus on mid-market transactions. Our team brings their insights and experience of well over 1000 deals to support clients on the full range of issues that can arise during the deal process: from negotiating ‘locked box’ or completion mechanisms and accounting warranties, to finalising completion accounts and earnouts, resolving disputes and undertaking expert determinations.


Patrick O'Brien