The ease of completing opening balance sheet accounting and working capital settlements are largely dependent upon the company’s historical financial processes and team in place. Transaction closing dates in the middle of the month, as opposed to a month-end cutoff, can also cause additional procedures to be necessary to complete working capital and opening balance sheet calculations. Working capital settlements generally have true-up periods ranging from 90 days to 180 days, dependent upon the transaction and nature of the business. Ideally the working capital target, or peg, established in the purchase agreement was based upon historical activity during the due diligence process using assumptions and methodologies that are easily re-performed and analyzed. When the purchase agreement contains dollar for dollar settlement between a buyer and seller, as opposed to a range around the peg, getting the opening balance amounts right can be the difference in a significant payment multiple shift, depending upon which direction settlement payment is due. While the key measure of the liquidity of a company at a specific moment in time, working capital settlements can also contain other true-up mechanisms from a purchase agreement, such as for differences in cash delivered at closing or debt payoff amounts.
Buyers should attempt to minimize estimates as much as possible in completing this settlement. Oftentimes opening balance sheet audit procedures may also be applied in the working capital settlement process. This can serve a dual purpose: 1) serve as support for the year-end audit, and 2) provide a level of assurance on the working capital amounts. It is worth noting that given the limited time period after a transaction and required working capital settlement period, it is likely that the amount in the working capital settlement may change by the year-end audit. For example, healthcare accounts receivable have a significant component of estimation that may not be realized until after the working capital settlement period is complete. These changes to accounting for opening balance sheet amounts can be made through goodwill, as opposed to through the income statement, for a period up to one year after the acquisition date.
Buyers also need to contemplate the need for independent valuation work performed on intangible assets acquired during a transaction. Private company accounting rules issued in recent years have made this process less onerous; however, buyers still need to make an assessment of whether any identified intangible assets (other than goodwill) were acquired and need to be valued. Buyers also need to consider potential impact of rollover equity issued in a transaction, and any significant differences that may need to be accounted for business combination accounting standards, which generally requires that all acquired assets and liabilities be recognized at fair value.