Net asset value when buying a company: how a target NAV adjusts the purchase price

When you buy a company, how do you deal with the fact that its value on the day you complete will not be exactly what it was when you agreed the price? One common answer is a net asset value adjustment. The parties agree a target net asset value, completion accounts measure the real figure, and the price moves up or down by the difference.

What is net asset value (NAV)?

Net asset value is a way to value a business and determine how much it is worth. It is calculated by taking all of the company's assets and deducting all of its liabilities. What is left is the net asset value.

Why net asset value changes

The net asset value of a company fluctuates. The amount of cash the company holds, or the stock it has on the shelves, goes up and down as the company trades, buying and selling products day to day. So the NAV on the day you agree the deal will not be the NAV on the day you complete.

Target NAV and completion accounts

Because of that movement, the parties would typically agree a target net asset value: how much the company should be worth as at completion. The price is agreed on the basis of that target.

Then, after the parties proceed to completion and the buyer has bought the business, completion accounts are produced. These are the financial accounts that record how much the company was actually worth as at completion. The actual NAV in the completion accounts is compared with the target NAV, and the purchase price is adjusted by the difference. If you want to see how this compares with a fixed-price deal, I cover both in locked box vs completion accounts.

NAV above target: price adjustment example

Let us assume the target net asset value was £1 million. The parties complete, the completion accounts are produced, and it turns out the actual net asset value of the company was £1.2 million, so £200,000 more than the target.

In that case £200,000 is added to the purchase price. The buyer owes an additional £200,000 to the seller, which is typically dealt with through the deferred payments.

NAV below target: price adjustment example

Now assume the opposite. The actual net asset value of the business turns out to be £800,000 instead of £1 million, so there is a £200,000 shortfall.

In that case the purchase price is reduced by £200,000, and the buyer owes £200,000 less to the seller. The mechanism works symmetrically: the seller is paid for what the company was actually worth on completion, no more and no less.

Next steps

If a NAV adjustment is proposed on your deal, make sure the SPA sets out clearly how the completion accounts are to be prepared and what counts as an asset and a liability, because that is where disputes arise. Speak to a corporate solicitor and your accountant together before agreeing the target figure. For the wider picture on how prices move after completion, see purchase price adjustments and earn-outs.