Completion Accounts vs. Locked Box (in English)

Closing Price Mechanism in M&A Transactions:

Sometimes, the time passing with intensive preparations, analyses, offers that may last for months and binding quotes submitted after starting due diligence processes are necessarily subjected to some financial corrections after agreement are signed. After all processes are over and when it is turn of a long-lasting, peaceful and deep sleep which could not be possible for months, it is unavoidable for one of parties (buyer/seller) to feel himself bad and to spend that week sleeplessly.
While the seller says “That was a sale under its value, we could sell it for a higher value”, the buyer deplores as “Adequate corrections may not have been made. We could buy this company for a better price.”

The status of consultants are a little more desperate, because, throughout the whole process, balances changed continuously, the parties left the table sometimes tactically and sometimes intentionally and finding a compromise was up to consultants. This is, in itself, an insistent dance of stomach and nerves.

Closing is hard

In recent years, especially in private M&A transactions made in different sectors in Europe, it is observed that the approach of “locked box” is more frequently used than the approach of “completion accounts” which is used while the price of company to be bought is determined.

The purchasing value of company or the purchasing value of shares becomes clear with signing an agreement (SPA) by the parties after they agreed on the price and other terms. In the following process, when the parties fulfil their liabilities, the buyer makes the payment to the seller. However, the cash, debts and working capital at the date of signing will naturally be different from digits at the closing date and following period.

Since there is a time difference between the date of signing SPA and signing date, the parties want the reflection of financial changes (cash, working capital, debts) in the enterprise to final closing amount in this interim period (and even in the period passed until making a co-decision). These calculations are made sometimes based upon beginning of month and sometimes based upon end of month. In companies with developed substructures, it is always possible to close in any day of a month and to make consistent estimations of last values.

This is exactly the subject: it is how to be handled by the parties the difference between realizations and estimations made for the net working capital (NWC) and Net Debt (ND) in the closing period (true-up process) after completion of liabilities by the parties.

I share the following table in order to ease our focusing on the subject without going into so many details:


As can be seen in the table, the subject is actually about when the risk is taken in a financial manner and how the parties are/will be affected from this. Both mechanisms are using “normalized working capital” and “cash free/debt free” concepts while calculating enterprise value.

In other words, while using the Completion Accounts method; the buyers make the payment as of the date of completing the assets and liabilities transaction (After completion, they deducts the necessary corrections from this price). The final purchasing price cannot be known until corrections in above-mentioned items are made.

While using the Locked Box method; a sale price is determined which buyers and sellers agree upon by examining previous balance sheet data (NWC, CF, DF) and the share purchase agreement (SPA) is signed. Since generally NWC, CF, DF are estimated, any amendments are not made in these items and only changes in other items determined by the parties that we can call as ‘leakage’ are considered.

In some cases, the parties deem suitable to make NWC, CF and DF estimations in the period when the transaction is finally completed. (So, as of this date, the right of getting benefit from values to be created by the enterprise passes to the buyer alongside of the economic right.) This situation actually brings with it more confusion and creates a hybrid composition of both models. However, when we look from sellers’ aspect, it seems like a qualified way of sleeping more than buyers in the week following completion of the transaction.

Based on the table we shared, we can say that both methods have different advantages and disadvantages for buyers and sellers:



There are two terms that must be particularly considered in the use of Locked Box method for final price determination while closing a deal:

 The items that the parties will determine as leakage must be clearly determined in SPA (profit distributions, management bonuses, wage increases, transfers to parent company, consultancy service invoices etc.). Permitted and Unpermitted Leakages must be clearly determined as much as possible.

 Ensuring reception of a share by sellers from incomes to be obtained after values to be created by the enterprise and economic risk passed to the buyer or giving all incomes to the seller

The M&A transactions which made in recent years, last more than averages of previous years (definitely, the size of transaction is an important criteria) and the period from signing MOU to signing the transaction may be about 6-12 months. Therefore, most sellers prefer the Locked Box method in order to take less enterprise risk. However, corrections of final purchase price continue to be an important question of debate between the buyer and the seller.

Please, feel free to comment or share your thoughts.