In the ever-evolving landscape of Mergers and Acquisitions (M&A), completion accounts are no longer just a post-transaction formality, they are becoming a strategic battleground where some emerge victorious, while others face regrettable outcomes. Recent paradigm shifts by some players are also turning it into a calculated tool for extracting additional value – sometimes exceeding the deal’s overall worth. As market uncertainty heightens and financial landscapes become increasingly unpredictable, more parties are willing to roll the dice on formal expert determination processes. The game has shifted from playing fair to playing aggressively to secure a win.
Achieving a fair allocation of risk and value demands a robust game plan, necessitating careful planning and meticulous focus during sale and purchase agreement negotiations. Every word carries weight, every agreement must be documented and every detail is crucial to safeguard the hard work invested in reaching completion.
Introducing the Game Plan Series by Kardia
Sarah Grant, the founder of Kardia and a prominent SPA advisor in the Australian M&A market, presents a comprehensive four-part series: “Mastering Completion Accounts: Kardia’s Proven Game Plan for Success”. This series is designed to empower all players across the M&A spectrum, advisors and clients alike, with invaluable insights and strategies to enhance their approach to completion accounts.
Series Part 1: Forewarned is Forearmed
While significant focus during a transaction revolves around the headline price of the target business, there is also real value and risk within the balance sheet. A facet which is frequently overlooked until late in the transaction process, which can be a costly mistake.
Understanding the unique issues within a balance sheet can be a time-consuming process, but it is critical to ensuring value is not left on the table or an exposure unwillingly transferred. The negotiations of the items which adjust the purchase price, whether a dollar for dollar net debt adjustment or an adjustment against a target working capital or net asset reference, are also most successful when you forearmed with intimate understanding of the balance sheet.
Late discovery of significant issues which impact the purchase price can jeopardise the entire deal or result in undesired outcomes such as:
- substantial unexpected price adjustments;
- parties accepting unnecessary risks to get the deal done; or
- the deal slowing down and, in the worst-case scenario, not proceeding at all.
For instance, consider a scenario where a buyer uncovers a small provision on the balance sheet for a potentially material uninsured claim late in the process. The buyer may contemplate seeking a dollar-for-dollar net debt deduction, however this could slow or cancel the transaction. A further complication arises when the exact amount is not known before finalisation of the completion accounts. Consequently, a dilemma surfaces: would the seller consent to a last-minute indemnity if they want a clean exit or do the parties have to take the risk of the provision being wrong?
Early discovery is key to navigating such intricacies with agility and securing a favourable position.
The Kardia Solution: Front-End the Work
Kardia suggests an early approach to understand balance sheet issues. With 13 years of focused expertise in analysing transaction balance sheets, we offer a proactive strategy to pinpoint risks and value opportunities, which can lead to additional earnings adjustments and improved net debt versus working capital positions. Prepare for negotiations with confidence as we equip you to counter the other side’s arguments, ensuring a strong position. Our founder, known for identifying substantial value, can guide you through. Engaging Kardia early prevents late surprises and it allows your corporate development teams to explore detailed scenario planning for various alternatives. Choose Kardia for a smoother journey in the M&A landscape.
Special Warning for Term Sheets
Avoid agreeing to specific price adjustments before conducting due diligence. The unknowns lurking in the due diligence process could significantly impact how you define and measure the purchase price adjustments.