The Bite-Size Business Brief: Agreeing the price - completion accounts or locked box?

Completion accounts 

Locked box 

Overview

• The price is measured against an agreed metric of the target business (e.g. an agreed amount of working capital or net debt).

• Completion accounts are prepared post-completion and are used to confirm if the target's financial position, as at the date of completion, is consistent with the value in the acquisition agreement.
• The purchase price is adjusted up or down to align with the value reflected in the completion accounts.

• An exact purchase price is agreed between the parties prior to completion - the “locked box date”.

• This price is usually based on a recent set of pre-completion accounts (usually the most recent audited accounts).

• The buyer is unable to adjust the price after the locked box date, unless they can prove that there has been “leakage” (i.e. the value of the target business has reduced because of a certain agreed leakage event such as a disposal of significant assets or the termination of a material contract etc).

Pro-Buyer: buyer receives comfort that the price they will pay reflects the actual value at the time of completion.

Pro-Seller: seller receives price certainty subject to their adherence with the agreed leakage provisions, which they can generally control or agree to be treated as permitted leakage.

Key potential seller advantages

• Provides an accurate method for valuing a business.

• May reduce the complexity of the buyer’s financial due diligence exercise, given that there is less pressure to agree the price prior to completion, which should reduce the time and effort burden placed on a seller and management to collate and provide diligence information.

• The seller receives the benefit of any economic uplift within the business up to the date of completion.

• Price certainty on behalf of the seller.

• Avoids protracted negotiations with the buyer in respect of price adjustments, as occasionally experienced when using completion accounts.

• Generally, a locked box approach may allow a smoother negotiation and so may reduce transaction costs.

Key potential seller disadvantages

• Generally more complexity in negotiating the mechanism.

• May increase the overall timing of the transaction, as the buyer will require time and professional support to review the completion accounts and implement any price adjustments.

• Generally an increased risk of disputes arising, given the lack of price certainty and potential for adjusting the purchase price.

• A buyer may require onerous leakage provisions and a seller will usually need to grant indemnities in favour of the buyer which may inhibit the seller in their ability to fully operate the business prior to completion. 

• If the value of the business increases between the locked box date and completion, this will not be recognised in the purchase price (a notional percentage increase can be applied if there has been sizeable movement).

• A buyer may wish to conduct a more intensive due diligence process, given they will not have an ability to price adjust.