Locked box and completion accounts are two different methods to price an acquisition.

The key difference between the two is timing. Choosing the best method to use depends on whether the sellers of the target company can accurately calculate the value of each share (considering any debt, excess cash and normalised working capital) before or only after the completion date of a transaction. If before, a locked box is recommended; if after completion, completion accounts will be required.

Information requirements for each method

Locked boxCompletion accounts
  • Balance sheet on the locked box date (date to be chosen by the sellers with agreement from buyers)
  • Forecast cashflows covering the period between the locked box date and completion date (typically 6-8 weeks) and 2-3 months following completion
  • Accurate working capital records for at least the last 12 months, and a forecast of the working capital position up to the completion date
At completion:
  • Historic financial statements (audited are preferable)
  • Confirmation of cash and debt on completion
After completion:
  • Balance sheet at completion (e.g. Completion Accounts) prepared in the same convention as historic financial statements

Completion accounts

Traditionally, the completion accounts method has been most commonly used, whereby both parties agree a ‘cash free, debt free’ price for the target company which is then adjusted post-completion for the actual cash, debt and working capital position at the completion date.

Post-completion, completion accounts will need to be prepared to reflect the actual cash, debt and working capital position at the completion date, with the basis for preparation agreed in the Sale and Purchase Agreement (“SPA”). Negotiation and agreement of the completion accounts can be quite a lengthy process and might prove administratively challenging as this usually requires hiring external accountants to assist in preparation and review, and are often more difficult to prepare if completion is not at a month-end (or typical balance sheet date for the company). An SPA with completion accounts can also be considerably more complex as the accounting methodology for their preparation needs to be clearly defined.

Because of these challenges, it is becoming more common to use the locked box method. 

Locked box

The locked box method creates a fixed price deal by “locking the box”. To achieve this, the ‘cash free, debt free’ price for the target company is fixed, after adjustment for surplus cash and normalised working capital, by reference to a historical balance sheet at the locked box date. The cash, debt and working capital position of the target company is known at the locked box date (as it is a date set before completion), so the final adjusted price is agreed and written into the SPA.

With a locked box, completion accounts are not required and therefore no adjustment is made to the price after the completion date. Certainty on price at completion is particularly beneficial to sellers who may be nervous about ‘price-chipping’ post-completion.

However, the seller typically gives the buyer some protection against any unpermitted cashflows or “leakages” between the locked box date and the completion date which would reduce the balance sheet value of the company being acquired. These could include dividend payments, bonuses or transaction fees and expenses. Detail of permitted cashflows are included in the SPA, so the target company will need to prepare detailed cashflow forecasting.

Typically, we would always recommend the locked box method as it is more seller friendly, but requires more sophisticated financial planning and earlier preparation.

Tech Top Tip
Many high-growth technology companies experience significant cashflow swings weekly, so a balance sheet prepared at a month-end date could look very different to one prepared in the middle of the month. For example, SaaS companies commonly invoice customers at the beginning of the month but only get cash in at the end of the month when customers pay for their subscriptions. Therefore, for this type of business, we would recommend using a month-end locked box (ie when the cash is highest) as buyers will pay for cash over and above working capital requirements on top of the headline price for the target company.


Summary of the pros and cons for sellers

Completion accounts
ProsCons
  • No leakages in the SPA, so may speed up negotiations
  • Easier to prepare for a carve-out 
  • The sellers receive the benefit of all profits right up until completion
  • Costly and time-consuming to prepare and agree
  • More complexity in the SPA
  • Can result in disputes
  • Delay in agreement of the final price and more risk of ‘price-chip’
  • Less negotiating leverage for sellers in disputes as the transaction has already completed
Locked box
ProsCons
  • Certainty of price of completion
  • Simplicity – no completion accounts to prepare
  • Lower cost
  • Management able to focus on integration post-completion
  • Easier for sellers to compare bids in a competitive auction as the price is fixed
  • More control for sellers over accounting policies applied
  • Risk of business boom between locked box date and completion date which sellers would not benefit from
  • More detailed financial planning and cashflow forecasting required
  • Requires earlier planning and preparation