Completion accounts or locked box?

‘Completion accounts’ and ‘a locked box mechanism’ are two tools in share transactions that can be used to determine the purchase price. Both can be used but carry their own risks and advantages.

Locked Box Mechanism

In a transaction using the locked box mechanism, the parties will agree on a fixed purchase price based on a set of accounts made up to a specific date and no further adjustments are needed following completion. The economic risks transfer to the buyer from the ‘locked box date’ however the seller continues to run the business between the locked box date and completion of the transaction. However, the Seller must also undertake to be responsible for any ‘leakage’ since that date. ‘Leakage’ being monies or assets transferred out of the Company to their own advantage. This way, the Seller can’t asset strip the Company after the price has been agreed based on historic accounts.

Completion Accounts Mechanism

On the other hand, the completion accounts mechanism is when the purchase price is not fixed on completion and further adjustments will be necessary post-deal. This is done by preparing completion accounts based on the business’ balance sheet as at the date of Completion itself and then adjusting the purchase price based on the net assets or current assets of the Company (often a ‘cash/debt free’ or ‘Net Asset’ adjustments). An agreed amount will be paid on completion by the buyer, and the buyer takes control of the business and runs the risk from the date of completion. Completion Accounts are then prepared and an adjustment is made either way.  The Completion Accounts mechanism has become more common in more complex transactions as it enables the parties to go into greater detail and confirm a fair purchase price as at Completion itself as opposed to a historic date in time. However, when choosing the completion accounts there is still potential for disputes following completion when the accounts must be prepared and agreed which also comes with additional costs. The Seller also needs confidence that the balance of the purchase price will be paid and may also seek some form of security for this.

Either way, it is important to ensure that your team understands the practicalities of these mechanisms, the risks to you and how to mitigate these. Of course, these are just two of the potential Purchase Price mechanisms that could apply to your transaction. If you want to know more about these and purchase price adjustments from a legal perspective, please contact our Business Services Team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk