When it comes to selling a business, the true value often lies beyond the headline price. Buyers typically adjust the initial offer based on several financial factors, like profitability, net debt, and working capital. To ensure a fair price is paid, sellers and buyers must agree on a purchase pricing mechanism. Two of the most common options are locked box and completion accounts, each with its own set of advantages and challenges. 

While completion accounts have been the traditional choice for many years, the locked box mechanism is rapidly gaining popularity—particularly in today’s fast-moving M&A environment. It offers a fixed purchase price, set at a specific date, with no adjustments after closing. On the other hand, completion accounts allow for post-closing adjustments, aligning the final price with the target’s actual financials. 

Locked Box and Completion Accounts: Which Should You Choose for Your Next Deal? 

To simplify your decision between locked box and completion accounts, we’ve broken down both approaches based on their background, key considerations, and potential restrictions. 

The Locked Box Mechanism 

The locked box approach is often referred to as a “fixed price deal.” Here’s why: 

• The financial position of the Target is fixed as of a pre-agreed date, called the locked box date. 

• The Buyer evaluates enterprise value (EV), net debt, and normalized working capital (NWC) based on the locked box date. 

• After deal signing, no post-closing adjustments to the purchase price are allowed. 

A crucial aspect is the locked box period—the gap between the locked box date and the Closing date. During this time, the Buyer aims to preserve the Target’s value, while the Seller must adhere to restrictions, such as: 

Value Leakage: Prohibitions on dividends, non-operational payouts, or other cash outflows that might reduce the company’s value. 

Permitted Leakage: Specific transactions agreed upon in the purchase agreement that are excluded from restrictions. 

To compensate for maintaining the business during the locked box period, the Seller may negotiate a value accrual, representing additional cash flow or a fixed interest on equity value. 

Key Considerations: 

• The locked box date must balance due diligence requirements and risk mitigation. Typically, a date 2–3 months prior to Closing is ideal. 

• An overly distant locked box date increases the risk of value loss for the Buyer. 

The Completion Accounts 

Unlike the locked box, the completion accounts mechanism allows for post-closing adjustments. This method is dynamic and involves: 

• Preliminary Balance Sheet: The Seller provides a provisional closing balance sheet before the Closing date, used to estimate the purchase price. 

• Preliminary Purchase Price: The Buyer pays this amount upon signing. 

• Final Balance Sheet: After closing, the Buyer prepares the completion accounts to finalize net debt, NWC, and other financial metrics. The Seller reviews and can dispute these accounts. 

• Price Adjustment: Any difference between the preliminary and final purchase price is settled. 

Key Considerations: 

• Definitions of cash, debt, and working capital must be explicitly detailed in the acquisition agreement to avoid disputes. 

• Dispute resolution mechanisms, including appointing an independent accountant, should be agreed upon during negotiations. 

Now that you have a solid understanding of both locked box and completion accounts, let’s dive into a comparison of their advantages and disadvantages to help you choose the most suitable option for your deal. 

Locked Box and Completion Accounts: Breaking Down the Potential Benefits and Drawbacks   

When choosing between the locked box and completion accounts methods, it’s crucial to understand how each affects the overall deal structure. Here’s a brief breakdown of their benefits and potential drawbacks: 

Transaction Complexity: The completion accounts approach is typically more involved, requiring post-closing preparation of the final accounts. This can delay the determination of the purchase price for months and demand significant time and resources from both parties. On the other hand, locked box and completion accounts methods have contrasting benefits, with the locked box simplifying the process by agreeing on a fixed purchase price upfront, allowing the transaction to proceed more smoothly. 

Price Certainty vs. Accuracy: The completion accounts method offers a more precise purchase price since it’s based on the actual financial situation of the company at completion. This can be advantageous if there are concerns about the target company’s financials leading up to the closing. However, locked box guarantees price certainty at signing, eliminating any post-closing surprises. 

Funding Certainty: Buyers prefer a locked box when they seek certainty regarding the funds required for the transaction, as the price is set in advance. In contrast, completion accounts may result in additional payments from the buyer if the final purchase price exceeds the preliminary amount, creating potential funding uncertainty. This risk can be mitigated by setting caps and collars on price adjustments. 

Risk and Leakage: When you choose between locked box and completion accounts, one of the major concerns with the locked box structure is that it doesn’t account for post-signing changes in the target’s financial position, such as value leakage. If the target suffers losses or experiences unexpected financial changes after the locked box date, these risks fall to the buyer. Completion accounts, however, allow for post-closing adjustments to reflect the actual situation at completion, making this approach less risky for buyers in volatile markets. 

Potential for Dispute: Among the locked box and completion accounts, the completion accounts process often opens the door for disputes, particularly if the buyer and seller disagree on the final adjustments. In fact, disagreements over the purchase price and financial metrics are relatively common. In contrast, locked box deals reduce the potential for disputes, as the purchase price is fixed at signing, offering a more straightforward approach for both parties. 

With a clear understanding of both mechanisms, you’re now better equipped to make an informed choice. Whether you’re scaling a company, expanding into new markets, or entering a venture or investment, aligning your decision with your strategic goals ensures greater control and confidence in the process. To choose between locked box and completion accounts, rely on professional M&A advisory services that can align the financial mechanism with your strategic goals, ensuring a seamless and well-informed transaction. 

Craft the Perfect Pricing Structure: MS’s Expertise in Locked Box and Completion Accounts 

At MS, we specialize in providing expert guidance on structuring and implementing purchase price mechanisms tailored to your unique M&A transaction needs. With extensive experience in the UAE and international markets, we offer a comprehensive approach that considers every aspect of the deal, from regulatory compliance and market conditions to your strategic business objectives. Our team of seasoned professionals ensures a seamless process by crafting customized solutions, whether you opt from locked box and completion accounts, to achieve fair and transparent outcomes. By leveraging industry insights and advanced analysis, we help mitigate risks, maximize value, and maintain clarity throughout negotiations