The headline price in a deal announcement is almost never what changes hands. Between signing and the final payment sits a pricing mechanism, and there are two of them in common use. Which one you have determines who carries the risk of what happens to the business in the weeks around completion, and it is agreed early, often before anyone has thought carefully about it.
Completion accounts
The traditional approach. The parties agree an enterprise value, then adjust it for the actual cash, debt and working capital in the business at completion. Accounts are drawn up as at the completion date, the adjustment is calculated, and money moves to settle the difference.
The logic is clean. The buyer pays for the business as it actually was on the day they got it.
The difficulty is that everything depends on definitions, and the definitions are drafted by lawyers and applied by accountants to a balance sheet nobody has seen yet.
What counts as debt? Almost always bank borrowing. Usually finance leases. Arguably the overdrawn director’s loan, the unpaid tax, the deferred consideration from a previous acquisition, the dilapidations provision on a lease. Each of these is a negotiation, and each one moves the price.
What is the working capital target? The adjustment compares actual working capital at completion against a normal level agreed in advance, usually an average of recent months. If the target is set from a period that was not representative, one side gets a windfall. Seasonal businesses make this harder, and a business growing quickly will consume working capital in a way a trailing average understates.
And who prepares the accounts? Usually the buyer, who now controls the business and the ledgers. The seller gets a review period and a dispute mechanism, but they are reviewing someone else’s work on a company they no longer run.
Locked box
The alternative fixes the price at signing by reference to a balance sheet at a date already in the past, the locked box date. The buyer does its diligence on that balance sheet, agrees the equity price from it, and there is no post-completion adjustment at all.
Economic risk and reward pass at the locked box date rather than completion, so the buyer gets the profits of the intervening period. The seller is often compensated for the delay through a daily interest charge on the price, sometimes called a ticker.
The protection the buyer needs is against value being taken out of the business between the locked box date and completion. That is leakage, and the agreement prohibits it: no dividends, no management charges, no deal bonuses, no repayment of shareholder loans, no assets transferred to connected parties. Anything genuinely expected and agreed goes on a permitted leakage list. Anything else is recoverable, usually in full.
The appeal is certainty. Everyone knows the number at signing, there is no post-completion process, and no dispute mechanism to fall into.
How each one fails
Completion accounts fail through definitional disputes. Something sits on the boundary of debt or working capital, both sides read the clause differently, and a seven figure disagreement goes to expert determination. It is slow and expensive and it sours a relationship that may still have an earn-out running through it.
Locked box fails when the balance sheet it is fixed on turns out not to be reliable. There is no recalculation to catch it, so the buyer’s only route is a warranty claim, which is a harder and slower thing than a price adjustment. That is why a locked box needs a quality of earnings exercise and a properly diligenced balance sheet. It is a mechanism that transfers risk onto the quality of the historical accounts.
Which to use
Locked box suits a clean business with reliable monthly reporting and a recent, audited or well-diligenced balance sheet. It suits a competitive auction, where a seller can push for certainty. It suits a shorter gap between the locked box date and completion.
Completion accounts suit a business whose balance sheet moves significantly, a carve-out where the perimeter is still being defined, or any situation where the buyer cannot get comfortable with historical numbers.
Whichever you end up with, the work that improves your outcome is the same: clean monthly management accounts, a working capital profile you can explain, and a defensible view of what is debt-like in your own balance sheet, prepared before the buyer forms theirs. The party that arrives with an evidenced position tends to keep it.