How Completion Accounts Work In Business Sales

Say Priya runs a small wholesale food business in Melbourne. A buyer offers $850,000, everyone shakes hands on the headline price, and settlement happens smoothly. Then, a few weeks later, the buyer sends Priya a set of completion accounts showing that the business had less working capital than expected on completion - and asks for $45,000 back.

If you're selling or buying a business, that kind of post-completion adjustment can feel confusing, especially when you thought the deal was done. The good news is that a well-drafted completion accounts mechanism can make this process predictable, fair and much less stressful.

Completion accounts are common in Australian small business sales, particularly where the value of stock, debtors, creditors, employee entitlements or cash can move between signing and completion. They don't have to be complicated, but they do need clear rules.

What Is A Completion Accounts Mechanism?

A completion accounts mechanism is a set of rules in your sale agreement that adjusts the purchase price after completion, based on the financial position of the business at completion.

In simple terms, it answers this question: did the buyer get the business in the financial condition both sides agreed on?

For example, the parties might agree that the purchase price assumes the business will have:

• a certain amount of working capital
• no undisclosed debt
• a particular level of stock
• all normal trade creditors accounted for
• employee entitlements properly calculated

After completion, the buyer or seller prepares completion accounts. These accounts compare the agreed target position against the actual position on the completion date. If there's a gap, the purchase price is adjusted up or down.

This is different from simply agreeing on a fixed price and walking away. With completion accounts, the final amount payable isn't fully settled until the post-completion review has finished.

You might see this used in a:

• business sale agreement, where you sell the assets and goodwill of your business
• share sale agreement, where the buyer acquires the shares in your company
• unit sale agreement, where the business is held through a unit trust

The exact structure matters because the buyer may take on different assets, liabilities and risks depending on whether it's an asset sale or share sale. For example, in a share sale, the buyer usually takes the company with all its liabilities, so the completion accounts are often more detailed.

How Does The Purchase Price Change After Completion?

The purchase price changes after completion if the agreed financial metrics are higher or lower than the targets in the sale agreement.

Let's use a simple example. Sarah runs a cafe in Brisbane and agrees to sell it for $600,000. The agreement says the price assumes the cafe will have $80,000 of working capital at completion.

On completion, the accounts show:

• stock, debtors and other current assets of $130,000
• trade creditors and other current liabilities of $70,000
• actual working capital of $60,000

The agreed target was $80,000, but the actual working capital was $60,000. That means the buyer received $20,000 less working capital than expected. Depending on the wording, Sarah may need to pay the buyer $20,000, or the buyer may be able to deduct it from a retained amount.

The reverse can also happen. If actual working capital was $95,000, Sarah may be entitled to an extra $15,000.

Common adjustment types include:

• upward adjustment, where the buyer pays more because the business had more value than expected
• downward adjustment, where the seller repays or forfeits part of the price because the business had less value than expected
• set-off, where the adjustment is deducted from an amount still held back
• escrow or retention, where part of the price is held until completion accounts are finalised

Many SME deals use a retention because it avoids the awkward situation of chasing money after completion. For example, the buyer might pay 90% at completion and hold 10% until the completion accounts process is finished.

What Is A Working Capital Adjustment In A Business Sale?

A working capital adjustment in a business sale is an adjustment that compares the business's actual working capital at completion against an agreed target amount.

Working capital is usually the difference between current assets and current liabilities. In a sale context, it often includes normal trading items, such as:

• stock or inventory
• trade debtors
• work in progress
• prepayments
• trade creditors
• accrued expenses
• customer deposits

It usually doesn't include everything on the balance sheet. The agreement should spell out what counts and what doesn't.

Why The Target Matters

The target working capital figure is one of the most negotiated parts of a completion accounts mechanism.

If you're the seller, you'll want the target to reflect a normal level of working capital for your business, not an inflated amount that makes it easier for the buyer to claim a price reduction. If you're the buyer, you'll want to avoid paying full price for a business that's been stripped of cash, stock or collectable debtors just before completion.

A fair target is often based on an average over a sensible period, such as the last 12 months of trading. That said, the right period depends on your business. A seasonal business, like a tourism operator or fashion wholesaler, may need a more tailored approach because one month can look very different from the next.

What Should Be Included Or Excluded?

This is where disputes often start. Two people can look at the same balance sheet and disagree about whether an item should count.

Your agreement should be clear about items such as:

• whether slow-moving stock is valued at full cost, discounted value or nil
• whether overdue debtors are included
• whether related-party debts are excluded
• whether GST, payroll liabilities and superannuation are treated separately
• whether customer deposits reduce working capital
• whether employee leave entitlements are included as liabilities

Employee entitlements can be a real issue in Australian deals. If employees transfer with the business, the sale agreement should deal with accrued annual leave, long service leave and other entitlements under the Fair Work Act 2009 and any relevant state or territory long service leave laws. Those amounts can materially affect the final price.

What Are Debt-Like Items And Cash-Like Items?

Debt-like items are liabilities that reduce the value of the business, while cash-like items are assets that may increase the value or reduce debt on completion.

In many deals, the headline price is agreed on a cash-free, debt-free basis. That means the seller keeps the cash, pays out debt, and the buyer gets the business without taking on debt, unless the agreement says otherwise.

Debt-like items can include:

• bank loans
• equipment finance
• director or shareholder loans
• unpaid superannuation
• unpaid employee entitlements
• tax liabilities, where the parties agree they're treated as debt-like items
• litigation or claim provisions, if relevant to the business
• deferred payments to suppliers

Cash-like items can include:

• cash at bank
• cash floats
• short-term deposits
• refundable bonds or deposits
• certain receivables, if the agreement treats them that way

The detail matters. For example, a cleaning business might have $25,000 in equipment finance attached to vans. If the buyer is taking over those vans and the finance remains with the company, the buyer will want that treated as debt-like. If the seller pays it out at completion, it may not need to reduce the price.

You should also check the Personal Property Securities Register if assets are subject to security interests. A buyer will usually want clear rules about which registrations are released at or before completion, and which liabilities remain with the seller.

How Does A Completion Accounts Review Work?

A completion accounts review usually works by having one party prepare the accounts after completion, the other party review them, and any disagreement dealt with through a set dispute process.

The process should be written into the sale agreement and reflected in a practical completion checklist. Without a clear process, you may end up arguing about timing, access to records, accounting standards and who has the final say.

Step 1: Prepare The Completion Accounts

The agreement should say who prepares the first draft of the completion accounts. In many SME transactions, the buyer prepares it because the buyer controls the business records after completion. In other deals, the seller prepares it because they know the business and its accounting system best.

The agreement should also say when the accounts must be delivered. This is negotiated. Common timing ranges from a few weeks to a few months after completion, depending on the size and complexity of the business.

Step 2: Apply The Agreed Accounting Policies

The accounts should be prepared using the accounting policies set out in the agreement. These might refer to:

• the same policies used in the last audited or management accounts
• Australian Accounting Standards
• specific rules agreed between the parties
• a hierarchy if those rules conflict

For smaller businesses, accounting records can be messy. That's exactly why the sale agreement should include practical rules, not just a broad statement that accounts will be prepared fairly.

Step 3: Review And Object

The reviewing party should have a defined period to review the accounts and raise objections. The exact period is a commercial point to negotiate, but it should be long enough to check the numbers properly.

During this stage, you may need access to:

• management accounts
• bank statements
• stocktake records
• debtor and creditor listings
• payroll reports
• superannuation records
• supplier invoices and customer contracts

If you're selling, make sure the agreement protects confidential information and limits access to what is reasonably needed. If you're buying, make sure you have enough access to test the numbers.

Step 4: Resolve Disputes

If the parties can't agree, the agreement should set out a dispute process. For completion accounts, this often means referring the accounting issue to an independent accountant rather than going straight into a broader legal dispute.

The agreement should say:

• how the independent accountant is appointed
• whether the accountant acts as an expert or arbitrator
• what issues the accountant can decide
• who pays the accountant's fees
• whether the accountant's determination is final and binding

This type of process can save a lot of time and cost. It also keeps the fight focused on the numbers, rather than turning every accounting disagreement into a wider dispute about the deal.

What Should A Business Sale Adjustment Clause Cover?

A business sale adjustment clause should cover the formula, timing, accounting rules, access rights and dispute process for any post-completion price adjustment.

At a minimum, you should think carefully about these points before you sign.

The Adjustment Formula

Your agreement should clearly state how the adjustment is calculated. Avoid wording that sounds sensible but doesn't produce a clear number.

For example, instead of saying the price will be adjusted for working capital, the clause should define:

• the target working capital amount
• the actual working capital calculation
• which assets and liabilities are included
• whether the adjustment is dollar-for-dollar
• whether there's a cap, collar or minimum threshold

A collar means small differences don't trigger an adjustment. For example, the parties might agree there's no adjustment unless the difference is more than $10,000. Whether that suits your deal depends on the size of the purchase price and how volatile the business is.

The Completion Date And Cut-Off Time

You need a precise cut-off point. Is completion measured at 5pm on the completion date, midnight before completion, or another time?

This matters for businesses that trade daily, like cafes, online stores, clinics and retailers. A single day of sales, stock purchases or payroll can change the numbers.

Stocktake And Valuation Rules

If stock is a major asset, the agreement should explain how the stocktake will happen.

Consider who attends, how damaged or obsolete stock is treated, and whether stock is valued at cost, net realisable value or another agreed basis. If you sell perishable goods, fast-moving consumer products or seasonal items, this can make a big difference.

Records And Access

The clause should give the reviewing party access to the records needed to check the accounts. It should also include confidentiality protections, especially if sensitive customer, supplier or employee information is involved.

If personal information is shared during the process, you should also think about your obligations under the Privacy Act 1988. Not every small business is covered by the Privacy Act, but many are, including businesses with annual turnover over $3 million and some businesses in specific sectors. Even where the Act doesn't apply, it's still good practice to limit access to what is genuinely needed.

Warranties And Misleading Information

Completion accounts don't replace warranties. They work alongside them.

The seller may give warranties about the accuracy of accounts, ownership of assets, employee entitlements, contracts and undisclosed liabilities in the business sale agreement. If the seller gives inaccurate information during the sale process, Australian Consumer Law issues can also arise, particularly the prohibition on misleading or deceptive conduct in Schedule 2 to the Competition and Consumer Act 2010.

If you're selling, don't guess your numbers or overstate the position. If you're buying, don't rely only on high-level summaries during buyer due diligence. Ask for the records that support the figures.

Common Mistakes To Avoid

The biggest mistake is treating completion accounts as an accounting detail to sort out later. They can change the amount of money that actually changes hands.

Here are the issues we see come up often in SME transactions.

• Agreeing To A Headline Price Without The Adjustment Rules: A $700,000 price means less if the buyer can later claim a large downward adjustment under unclear wording.
• Using A Template Without Tailoring It: Templates often miss industry-specific issues, like perishable stock, prepaid subscriptions, work in progress or customer deposits.
• Leaving Working Capital Undefined: If the agreement doesn't say what counts, each side may calculate it differently.
• Forgetting Employee Entitlements: Annual leave, long service leave, redundancy risk and unpaid superannuation can all affect value.
• Ignoring Related-Party Transactions: Loans to directors, family supplier arrangements and intercompany balances should be clearly dealt with.
• No Dispute Process: If there's no expert determination process, a disagreement about numbers can become slow and expensive.
• Poor Completion Records: If you can't prove what the business looked like at completion, you may struggle to support your position later.

If you're selling, get your accounts, employment records, supplier balances and stock records cleaned up before due diligence starts. If you're buying, test the assumptions behind the target working capital and debt-free position before you commit.

A completion accounts mechanism review works best when your lawyer and accountant are aligned. Your lawyer can make sure the adjustment clause is enforceable and clear, while your accountant can help test whether the numbers and accounting policies make commercial sense.

Key Takeaways

• A completion accounts mechanism adjusts the purchase price after completion based on the business's actual financial position.
• Working capital targets, debt-like items and cash-like items need clear definitions in your sale agreement.
• A business sale adjustment clause should cover the formula, timing, records, accounting policies and dispute process.
• Employee entitlements, stock, customer deposits and related-party balances are common sources of disagreement.
• A clear completion accounts review process can help you avoid drawn-out disputes after settlement.
• Your sale agreement should be tailored to the business, because small wording differences can change the final price.

If you'd like help with your business sale agreement, completion accounts clauses, working capital adjustments or sale due diligence, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.