Locked Box or Completion Accounts: Pricing Mechanism
Even when both parties agree on price, if they can't agree on how that price is preserved until closing, the deal can stall at the last minute.
The logic of the locked box method
In the locked box method, the price is fixed based on a specific historical balance sheet, usually the latest audited financials; any value leaving the company between that date and closing, such as dividends or management fees, gets compensated to the buyer.
This method gives the seller price certainty at the start of the process and largely eliminates the prolonged post-closing price negotiations.
The logic of the completion accounts method
In the completion accounts method, the price is recalculated after closing based on the actual cash, debt, and working capital figures as of the closing date; the final price is only settled weeks after closing.
This method offers the buyer a fairer price guarantee reflecting the real financial position at closing, but it carries a risk of post-closing disputes.
Which method fits which situation
The locked box method is more common in competitive auction processes where the seller holds strong bargaining power, and in companies with a stable financial position.
Completion accounts can be more suitable when the target company's cash flow or working capital is volatile, or when the buyer wants full transparency right up to closing.
Designing leakage protection
In a locked box structure, any payment from the company to the seller or related parties between the locked date and closing is defined as "leakage" and compensated to the buyer; the scope of this definition needs to be extremely clear in the agreement.
Permitted leakage items, such as ordinary-course salary payments, should be explicitly listed in advance; otherwise a post-closing dispute risk arises.
A practical middle ground in negotiation
In some deals, the parties use hybrid structures to combine the price certainty of the locked box method with the accuracy of completion accounts; for example, a limited verification mechanism is added on top of the locked box price.
Such a hybrid structure tries to address both parties' core concerns, but it requires extremely careful contract drafting.
M&A Transaction CapabilityThe construction of the process decides the outcome as much as the price. We build the process in your favour and see the surprises before they reach the table.
Learn moreFrequently asked questions
Which method favors the seller?
Usually the locked box, since it provides price certainty and removes the risk of post-closing adjustment.
How long does the completion accounts process take?
Typically completed within 60-90 days after closing; this can extend for complex deals.
Can the two methods be used together?
Yes, some deals use hybrid structures, but this adds extra negotiation complexity.
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