Completion Accounts vs Locked Box: Which Pricing Mechanism Should I Choose?

An important decision in an M&A transaction is the type of pricing mechanism the parties will use in the share purchase agreement (SPA). A pricing mechanism is used to determine the final acquisition price that the buyer must pay to acquire the shares in the target company. In private company sales, two pricing mechanisms are commonly used: completion accounts and locked box.

While both mechanisms are designed to reach a fair price and (in theory) arrive at a similar value, they do so in different ways. In practice, the choice of structure affects price certainty, timing, risk and the possibility of disputes after the deal has completed. The parties therefore need to be alive to the advantages and disadvantages of each, both from a seller and a buyer perspective.

‍

How is a target business valued?

A target business is typically valued by reference to its “enterprise value”, commonly using a multiple of EBITDA (earnings before interest, tax, depreciation and amortisation).  

That valuation is then adjusted for items such as cash, debt and working capital, with the buyer usually expecting a cash-free, debt-free business delivered with a normal level of working capital. The mechanism used to convert enterprise value into the price actually paid for the shares (often referred to as “equity value”) is where pricing mechanisms come in.

‍

Completion accounts vs locked box

Completion accounts

The premise of completion accounts is straightforward: the buyer should pay for what it actually receives on completion.

The parties agree the broad economics of the deal when they sign the SPA, but the final price is not fully settled at that point. Instead, the buyer pays a provisional amount on completion by reference to the likely balance sheet of the target business at completion.

After completion, accounts are prepared to show the company’s actual financial position as at the completion date. Those accounts are then used to adjust or “true-up” the price, usually by reference to its cash, debt and working capital.

This has an obvious attraction, particularly for buyers. If the business has less cash than expected, more debt than expected, or insufficient working capital, the buyer could seek a downward adjustment of the purchase price. Equally, if the position is better than expected, the seller may benefit from an upward adjustment.

‍

Locked box

A locked box works differently. Instead of adjusting the price after completion, the parties fix the price in advance by reference to a historical balance sheet at an agreed date before completion. This is known as the “locked box date”.

From the locked box date until completion, the seller agrees not to extract value from the target business unless the parties have specifically agreed that it is allowed. The buyer will rely on contractual protection, and any unauthorised extraction of value is known as "leakage". Leakage can include things like dividends or distributions, management charges, repayments to the seller, excessive bonuses, or transaction costs paid by the business for the seller’s benefit.

Some items are commonly allowed and are treated in the SPA as “permitted leakage”. These may include things like ordinary salary payments, arm’s length trading payments or specified sums already factored into the agreed purchase price.

Because the locked box date is earlier than completion, the seller may argue that it should receive some compensation for the profits generated by the business in the interim period. This is often dealt with through a “ticker”: an agreed daily amount or interest-style accrual added to the price between the locked box date and completion.

‍

Pros and Cons

Completion accounts

Pros: Seller

• The parties are not required to determine a final equity value at the outset, which can reduce friction during negotiations, allowing the transaction to progress more quickly to signing.
• The seller will continue to benefit from the trading performance of the business up to completion.

‍

Pros: Buyer

• The purchase price is determined by reference to the completion accounts, ensuring it reflects the true financial position of the business at completion.
• Any decline in working capital or increase in indebtedness prior to completion is usually captured through the adjustment mechanism, reducing the risk of overpayment.
• The mechanism relies on up-to-date financial data, which may be particularly valuable where the business’s performance fluctuates.
• It’s usually the buyer who prepares the completion accounts, allowing it to apply agreed accounting policies while having unrestricted access to the businesses systems and personnel.

‍

Cons: Seller

• The final purchase price remains uncertain at completion and may be reduced following the buyer's preparation of completion accounts.
• Disputes as to the scope and basis on which the completion accounts are prepared could arise.
• After completion, the seller typically has limited involvement in the preparation of the completion accounts.
• The seller bears the risk of adverse movement in the business up to completion, including potential underperformance.
• If a dispute in relation to the completion accounts arises, the review and potential costs of preparation can be resource-intensive and costly.  

‍

Cons: Buyer

• A seller may be less likely to compromise on a price adjustment after signing, increasing the likelihood of disputes.
• The buyer may not know the final purchase price for a period following completion.
• Legal, accounting and expert costs may arise in preparing and negotiating the completion accounts or settling any disputes.

‍

Locked box

Pros: Seller

• The purchase price is fixed at signing (subject only to leakage provisions), providing the seller with certainty regarding the proceeds it will receive at completion.
• The risk of value deterioration passes to the buyer at the locked box date, insulating the seller from adverse movements in the business thereafter.  
• The seller may have more control over the process.
• The locked box accounts are typically prepared on a basis consistent with historical accounting policies, reducing scope for debate over accounting treatments.
• The absence of a completion accounts process simplifies the post-completion phase and avoids prolonged engagement between the parties.
• Eliminating the need for the preparation of completion accounts can reduce professional fees.

‍

Pros: Buyer

• A fixed price allows the buyer to arrange acquisition financing with greater clarity.  
• Management time is not tied up in preparing and debating completion accounts.

‍

Cons: Seller

• The seller will not get the full benefit from continued operation of the business in the interim period (other than through any agreed ticker or interest mechanism).  
• A ticker, if any, may be set too low to fully compensate the seller for the earnings of the business in the interim period.
• Buyers typically require extensive financial due diligence up front, increasing time and cost.
• The seller may be required to comply with strict leakage covenants and may be required to compensate the buyer for any value extracted.
• The seller is often subject to restrictions governing the conduct of the business between the locked box date and completion.

‍

Cons: Buyer

• With no post-completion adjustment, the buyer must rely heavily on due diligence and contractual protections (e.g. warranties and indemnities).
• The buyer bears the risk of any deterioration in the business between the locked box date and completion.
• Greater emphasis is placed on agreeing the locked box accounts and key financial assumptions at an early stage, which can extend the pre-signing phase.
• The buyer agrees the price based on historical accounts, often before it has had control or unrestricted access to all the financial information.

‍

Conclusion

Both mechanisms aim to achieve a fair price but differ in how they balance certainty and risk. Completion accounts can offer accuracy through post-completion adjustments and are generally regarded as buyer friendly. Locked box, on the other hand, can provide price certainty for a cleaner exit and is often the mechanism of choice for sellers.

The right choice will depend on the circumstances of the deal, including the parties’ bargaining power, financial stability of the business, and the parties’ appetite for risk and post-completion involvement.

At Culbert Ellis, we regularly advise clients on selecting, structuring, and negotiating the most appropriate mechanism to align with their commercial objectives.

‍

How to get in contact

To find out more or if you require assistance with these matters, speak with our Corporate Team on +44 (0)204 600 9907 or email info@culbertellis.com.