Two of the most common methods for determining the purchase price in an M&A transaction are the completion accounts approach and the locked box structure.
Completion Accounts
With completion accounts, the final purchase price is determined by reference to agreed financial metrics of the target business as at the completion date. The parties agree an initial estimate of the equity value, but the exact price is only finalised after completion, once the completion accounts have been prepared and reviewed.
Locked Box
In contrast, with a locked box mechanism, the exact purchase price is agreed upfront, usually based on the company’s most recent management accounts (the “locked box date”). There are no post-completion adjustments to the price. To protect their investment, the buyer typically requires the seller to provide warranties preventing any “value leakage” (e.g., dividends or unauthorised payments) from the locked box date up to completion.
Key Differences and Commercial Implications
Locked box mechanisms offer certainty and speed, favouring sellers, while completion accounts provide price accuracy and risk protection for buyers in more complex or uncertain transactions.
