Business Acquisitions – the problems associated with valuation

A sale and purchase agreement containing completion accounts provisions, and warranties associated with this, is intended to give the buyer the right to trigger a warranty claim in the event that the seller’s warranty as to the value of the target business is inaccurate or incorrect.

In that event, the agreement will likely also contain a price adjustment mechanism, by way of which the parties will be able to re-negotiate the purchase price, post-completion.

Over the years, I have been appalled by just how difficult it is, in practise, for a buyer to exercise its right to re-negotiate the purchase price pursuant to a purchase price adjustment mechanism in a sale and purchase agreement.

What the buyer will likely overlook, when it is negotiating the terms of the sale and purchase agreement itself, is that once the sale has been completed, and the dust settles, as it were, the seller will have very little incentive to cooperate with the buyer to agree an adjustment to the purchase price, and it is more often the case that the seller will look for ways to avoid any liability for breach of a purchase price warranty, and in the worst case scenario, will simply ignore the buyer’s claim, forcing the buyer to either take the matter to dispute resolution, and incur the cost, effort and risk of fighting the matter before a tribunal, or just give up altogether.

So I do not think that there is clear value for the buyer in including completion accounts provisions and a price adjustment mechanism in the sale agreement.

The alternative option to the completion accounts, and the price adjustment mechanism, is the locked box arrangement, where an ‘effective date’ is agreed, which predates the completion date, and which obviates the necessity for post-completion price adjustments, ostensibly providing the buyer with certainty of price.

But is the locked box approach itself entirely risk-free?

There are uncertainties associated with the locked box arrangement also, which can and frequently do result in much time spent on negotiating the terms of the arrangement.

From the viewpoint of drafting, agreeing the key defined terms of ‘effective date’, and ‘leakage’ of value, are far from straightforward exercises, and can take as much time and effort to negotiate, and leave the parties as dissatisfied, as may be the case with the completion accounts arrangement.

What then, is the best approach to valuation of a target business, in a business sale and purchase?

I would be interested to hear readers’ own comments and experiences in this context.

This post is for information purposes only and does not constitute legal advice. For legal advice on the subject of business acquisition, please contact

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