Completion accounts are the post-closing mechanism used in most private M&A deals to reconcile the price the buyer pays at closing with the company’s actual financial position on the closing date. The buyer pays a preliminary purchase price on the closing date based on estimates, and after the deal closes both sides prepare a detailed set of accounts capturing the real cash, debt, and working capital as of that moment. The gap between the estimated and actual figures becomes a true-up payment: the seller tops up the buyer, or the buyer pays more to the seller, depending on which way the numbers land. This keeps the seller economically exposed to the business right up to the handover, which is why the mechanism remains dominant in private company sales.
The alternative, a locked box, fixes the price at signing using recent audited accounts and relies on “no leakage” covenants instead of a post-closing adjustment. If your deal uses a locked box, none of what follows applies. Everything below assumes the parties chose completion accounts.
The Mechanics From Closing to Final Payment
The sequence is the same in most deals, even where the specific numbers and windows vary.
At closing, the buyer wires a preliminary purchase price. That price is built on estimates of cash, debt, and working capital as of the expected closing date, usually taken from management accounts prepared shortly before completion. The seller receives the estimated amount, ownership transfers, and the buyer takes control of the company’s books.
After closing, the buyer’s accountants prepare a draft set of completion accounts showing the actual position at the closing date. The seller reviews the draft, objects to what it disputes, and the parties either agree on the final numbers or send unresolved items to an independent expert. Once the accounts are final, the true-up payment moves by wire transfer, typically within five to ten business days.
The Working Capital Target (the Peg)
The working capital target, usually called the peg, is the single most consequential number in the framework. It represents the normalized level of working capital the business needs to operate, and every dollar the closing working capital deviates from the peg flows straight into the price adjustment.
The peg is typically calculated by averaging the company’s monthly working capital over the trailing twelve months before signing. Averaging smooths out seasonal swings that would distort a single-date snapshot. Both sides should scrutinize the calculation for one-time items, unusual accruals, and timing distortions that inflate or deflate the average. A seller who negotiates a lower peg faces a smaller risk of owing money back after closing; a buyer who negotiates a higher peg builds in more downside protection. Disputes over the peg are among the most common sources of post-closing friction, often because the parties never nailed down which items belong in working capital versus financial debt.
What Goes Into the Accounts
Three data components drive the numbers.
Working capital is current assets (inventory, accounts receivable, prepaid expenses) minus current liabilities (accounts payable, accrued expenses, deferred revenue). Net debt captures interest-bearing obligations, including bank loans and shareholder loans, offset by cash and cash equivalents. In a cash-free, debt-free deal, the definitions of cash and debt become critical, because items classified as net debt reduce the price dollar-for-dollar, while items classified as working capital only move the price if they deviate from the peg.
Every liability has to sit in one category or the other. Getting it wrong means double-counting an item or missing it entirely. Tax accruals and employee benefit obligations are frequent trouble spots because they can reasonably be classified either way depending on how the agreement defines working capital. Intercompany balances, revenue recognition cutoff timing, and inventory valuation cause the same kinds of arguments. The purchase agreement should specify the treatment rather than leave it to post-closing interpretation.
Where the agreement does not answer a measurement question, completion accounts follow a defined hierarchy. Specific accounting policies written into the purchase agreement come first. Items not covered by those policies are measured consistently with the target company’s most recent audited accounts. Anything not addressed by either layer falls back on the applicable accounting standards, whether GAAP, IFRS, or another framework the agreement names. This hierarchy decides who wins when two reasonable accountants would treat the same item differently.
Drafting and Objection Deadlines
Once the deal closes, the buyer’s accountants prepare the initial draft. The buyer controls this process because it now owns the target and has direct access to the books. The purchase agreement typically gives the buyer 30 to 60 days from closing to deliver the draft accounts, together with supporting schedules showing how each figure was derived.
When the seller receives the draft, the review clock starts. The seller and its advisors generally have 20 to 30 business days to inspect the buyer’s work, which requires access to the general ledger, bank confirmations, and the working papers behind the draft. Sellers need to be aggressive about exercising their contractual access rights. The buyer runs the company now and has every reason to be cooperative in theory but slow in practice.
If the seller spots problems, it must deliver a formal notice of objection before the review period expires. The notice has to identify each disputed item and the specific dollar amount at issue. Vague objections that fail to quantify the disagreement are typically insufficient. Missing the deadline is worse: if the seller fails to serve the notice within the contractual window, the buyer’s draft becomes final and binding. This is one of the most punishing deadlines in M&A, and sellers who treat it casually end up locked into numbers they never agreed.
Calculating the True-Up Payment
The math is straightforward once the accounts are finalized. The verified closing figures for working capital, cash, and debt are compared against the targets or estimates in the purchase agreement. If closing working capital exceeds the peg, the buyer pays the seller a top-up for the extra value left in the business. If it falls short, the seller refunds the difference. Separate adjustments for cash above or below an assumed level, and debt above or below an assumed level, work the same way.
Payments are usually settled by wire within five to ten business days after the accounts become final. On a deal with a $50 million enterprise value, a working capital swing of even two or three percent produces a seven-figure adjustment, which is why both sides invest heavily in the numbers.
De Minimis Thresholds and Collars
Many purchase agreements include a de minimis threshold or a collar that keeps small variances from triggering any adjustment. The logic is practical: if the deviation is $15,000 on a $100 million deal, the cost of arguing about it exceeds the amount at stake.
A de minimis provision sets a floor. No adjustment is made unless the variance exceeds that amount. A collar defines a range instead. If the actual closing working capital falls within, say, $250,000 above or below the target, no adjustment happens. Variances outside the collar trigger an adjustment for the full amount or only the excess, depending on how the provision is drafted. Parties should also consider de minimis limits on individual disputed line items, so the review focuses on material differences rather than rounding.
Dispute Resolution by Independent Expert
If the parties cannot resolve their differences through direct negotiation after the notice of objection, the dispute goes to an independent accountant. That person acts as an expert, not an arbitrator. The distinction matters: an expert applies their own professional judgment to reach a determination, while an arbitrator evaluates competing arguments and picks a winner. Most purchase agreements make the expert’s determination final and binding, with only “manifest error” as a basis for challenge, and courts read that exception very narrowly.
Both sides submit written representations and supporting evidence to the expert, typically within 30 days of appointment. The expert reviews the submissions against the accounting policies and definitions in the purchase agreement. Many deals contractually confine the expert to determining each disputed item within the range bounded by the buyer’s figure and the seller’s figure. This baseball-style constraint prevents the expert from landing on a number more extreme than either party proposed.
Decisions usually arrive within 30 to 90 days of appointment. Fee allocation commonly follows a loser-pays structure: the party whose figures deviate further from the expert’s determination bears a larger share of the costs, which discourages both sides from staking out extreme positions just to create negotiating room.
Escrows and Holdbacks
Because the accounts are finalized after closing, the buyer faces credit risk: what happens if the seller owes a refund but has already distributed the proceeds? Escrows and holdbacks solve this by reserving part of the purchase price until the adjustment settles.
In a holdback, the buyer simply withholds part of the purchase price at closing. In an escrow, the withheld funds sit with a neutral third-party agent. The amount typically runs 10 to 25 percent of the purchase price, though the figure depends on how large a working capital swing the parties consider plausible. Once the accounts are finalized and any adjustment payment is made, the remaining funds are released to the seller.
Sellers want the escrow small and the release quick. Buyers want the opposite. A well-drafted provision ties release to a specific trigger, usually the date the accounts become final and binding, whether by agreement, expiration of the objection period, or the expert’s determination. Some deals release in stages, with a partial release shortly after closing and the balance held until the adjustment process concludes.
Tax Treatment of the Adjustment
Post-closing adjustments are not treated as separate taxable events. They are adjustments to the original purchase price, which means they change the seller’s amount realized and the buyer’s cost basis in the acquired assets. Both sides reallocate the increase or decrease across the acquired asset classes.
For applicable asset acquisitions, the allocation follows the residual method under Section 1060 of the Internal Revenue Code, which requires consideration to be allocated among the acquired assets in the same manner as under Section 338(b)(5). If the buyer and seller agreed in writing to an allocation at closing, that agreement binds both parties for tax purposes unless the IRS determines the allocation is inappropriate.1Office of the Law Revision Counsel. 26 USC 1060 – Special Allocation Rules for Certain Asset Acquisitions
When the adjustment occurs after the tax year of the original purchase, the affected party files a supplemental Form 8594 with the income tax return for the year in which the adjustment is finalized. If the adjustment happens in the same tax year as the acquisition, it is treated as if it occurred on the purchase date. A new Form 8594 is required for every year in which an increase or decrease in consideration occurs, so a protracted dispute that spans multiple tax years can generate multiple filings.2Internal Revenue Service. Instructions for Form 8594 (Asset Acquisition Statement)
Protecting Yourself Through the Process
Completion accounts create an inherent informational asymmetry. The buyer controls the target’s books from the moment the deal closes, and the buyer’s accountants prepare the first draft. Sellers who do not negotiate robust protections at the purchase agreement stage end up reviewing numbers they cannot fully verify.
Sellers should insist on detailed access rights: the right to inspect the general ledger, interview finance staff, and review the working papers behind the draft accounts. The agreement should also include conduct-of-business provisions that stop the buyer from making accounting policy changes or unusual transactions between closing and the finalization of the accounts that could depress working capital.
Buyers should make sure the definitions of cash, debt, and working capital are specific enough to eliminate gray areas. Vague definitions invite disputes. The most contentious items in practice are inventory valuation, revenue recognition cutoff timing, the classification of certain accruals as working capital versus debt-like items, and the treatment of intercompany balances. Addressing these explicitly during drafting costs time in negotiation and saves far more after closing.