The headline price is rarely the final figure. Two mechanisms usually sit between them: an adjustment to reflect the actual state of the business at completion, and a retention held back as security. They do different jobs and carry different risks.
Settling the Final Figure
A price agreed months earlier assumes a business in a particular condition — a level of working capital, of stock, of debtors and creditors, of cash and debt. By completion, all of that has moved. Two broad approaches handle it. Completion accounts: accounts are drawn up as at completion and the price is adjusted afterwards by reference to defined measures. Accurate, and it means the final figure is not known on the day. A locked box: the price is fixed by reference to an agreed historic balance sheet, with the seller undertaking not to extract value in the intervening period. Certain, and it puts the risk of trading between that date and completion on the buyer. Whichever is used, the crucial drafting point is the same and is regularly neglected: specify the accounting policies for the calculation in the agreement itself, rather than leaving them to be agreed later. Most post-completion price disputes are disputes about how something was calculated, and they are almost entirely preventable at the drafting stage. Include a mechanism referring disagreements to an independent expert, so a dispute resolves in weeks rather than through litigation.
What a Retention Is Really For
A retention is part of the price held back at completion, usually in a separate or escrow account, for a defined period — released to the seller if nothing arises. It secures warranty claims, or a specific identified risk that turned up in diligence, or a price adjustment yet to be calculated. From the buyer’s side it is far more valuable than a warranty alone, for a straightforward reason: a warranty claim against a seller who has spent the proceeds is a judgment, not money, whereas a retention is money already in the right place. From the seller’s side the points to negotiate are the amount, the period, exactly what it can be drawn against, whether it sits in escrow with an independent party rather than with the buyer, whether interest accrues, and — importantly — a clear release mechanism so it does not require the buyer’s goodwill to get it back. Distinguish it from deferred consideration and earn-outs, which are different risks entirely: a retention is a security question, deferred consideration is a credit question, and an earn-out is a control question.
Diary the release date. Retentions are frequently not released automatically, and a seller who has filed the papers away and moved on is a seller who has to chase. Keep the post-completion diary.
Comparing offers, or negotiating the mechanics? 01 5827148.
Richard O’Shea — Solicitor & TEP
Solicitor at Mary Molloy Solicitors, established 1981, and a TEP of the Society of Trust and Estate Practitioners. The firm acts for buyers and sellers on business sales and acquisitions — structure, heads of terms, due diligence, the sale agreement, warranties and disclosure, completion and what follows it. Because a substantial share of Irish business sales are retirement exits, the firm’s estate and succession practice sits alongside the transactional work: the deal and what happens to the proceeds are usually the same client’s problem. Nothing here is tax advice — structure is tax-driven and that belongs with your accountant and Revenue, before heads of terms are signed. 01 5827148 · richardoshea@marymolloysolicitors.com · LinkedIn
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