Locked box versus completion accounts

Once a headline price is agreed, owners often assume the hard part is over. Then the lawyers start talking about locked box dates, completion accounts, leakage, and pegs — and it becomes clear that how the price is adjusted after signing can matter as much as the number on the term sheet.

Most UK and US SME sales use one of two mechanisms to bridge the gap between the value you negotiated and the cash you actually receive: a locked box, or completion accounts. Neither is automatically better. Each shifts risk and timing in a different way. Here is how we explain them to owners we work with.

What both mechanisms are trying to do

Between signing and completion, the business keeps trading. Cash moves, invoices are paid, debts are drawn or repaid, and owners sometimes take dividends or settle personal costs through the company. Buyers want to know they are still getting the economic package they priced. Sellers want to know the headline will not be chipped away by surprise adjustments.

Locked box and completion accounts are simply two different tools for that job. They sit alongside — but are not the same as — cash-free, debt-free and working-capital adjustments. Those decide what “enterprise value” turns into as equity value. Locked box and completion accounts decide which date’s balance sheet that conversion is measured against, and who bears trading risk in the gap.

How a locked box works

In a locked box deal, the parties pick a historical accounts date — often the last month-end or year-end that has clean management accounts. The price is fixed by reference to the balance sheet at that date. From then until completion, the economic benefit of the business usually belongs to the buyer, even though you still own the shares until completion day.

Because the price is meant to be fixed, the agreement typically forbids “leakage”: value leaving the company for the seller’s benefit after the locked box date. Ordinary trading payments are fine. Dividends, management fees to you, settling your personal bills through the company, or selling assets cheaply to a related party usually are not, unless they were agreed in advance as “permitted leakage”.

If leakage happens, you repay it pound for pound. There is normally no post-completion renegotiation of the whole balance sheet. That certainty is why many sellers like locked boxes when the accounts are reliable and the gap to completion is short.

How completion accounts work

With completion accounts, the parties still agree a headline enterprise value, but the final equity cheque is calculated from a balance sheet drawn up as at completion (or shortly after). Cash, debt, and often working capital are measured then, compared to agreed definitions and any peg, and the price moves accordingly.

That means more of the trading result between signing and completion can flow through to the seller — for better or worse. It also means there is a post-completion process: draft accounts, review rights, expert determination if you disagree. Deals can reopen commercially after you thought you were done.

Completion accounts suit businesses where the balance sheet moves a lot month to month, or where the parties cannot get comfortable locking a historical date. They demand clear accounting definitions. Vague wording on “debt-like items” or “normalised working capital” is where disputes start.

Where owners get surprised

The surprises are rarely the labels. They are the details:

• A locked box that still leaves a long list of open adjustments is not really locked.
• “Permitted leakage” that is too narrow can trap ordinary year-end bonuses or tax payments you already planned.
• Completion-account definitions that sweep in every accrued cost as debt can shrink the cheque without anyone changing the headline multiple.
• A working-capital peg set from an unrepresentative month can create a built-in price cut even when the business is healthy.
• Interest or a “ticker” on locked-box value for the period to completion is commercial — agree it early or assume it may be nil.

None of these is inherently unfair. They become painful when they appear late, after you have already anchored on a headline number with your family or your bank.

Which fits which situation

A locked box tends to work well when management accounts are clean, the locked box date is recent, and both sides want a quiet path to completion with fewer moving parts. It rewards preparation: if your accounts need explaining every month, locking them is harder.

Completion accounts tend to fit seasonal businesses, firms with lumpy working capital, or deals where signing and completion will be far apart. They ask more of your finance person after completion and leave more room for argument — so the definitions in the SPA matter as much as the price.

In smaller SME deals we see both. Long-term buyers who know the sector will often accept either structure if the diligence is solid and the accounts tell a consistent story. What we push back on is ambiguity dressed up as sophistication.

What to prepare before you choose

You do not need to decide the mechanism on day one of a conversation. You do need a clear view of your own numbers so you can react when a buyer proposes one. Before negotiations get detailed, it helps to have:

• Monthly management accounts you trust for at least the last twelve months.
• A simple bridge from EBITDA or operating profit to cash.
• A list of owner-related payments that would look like leakage under a locked box.
• A plain schedule of cash, debt, and items a buyer might call debt-like.
• A sense of how working capital moves through your normal trading year.

That pack lets your advisers test whether a proposed locked box date is fair, or whether a completion-accounts draft is quietly rewriting the deal.

Keep the headline and the mechanism in the same conversation

Owners sometimes celebrate a strong enterprise value and only later discover the mechanism that turns it into cash. Treat them as one package. Ask, early: Is this a locked box or completion accounts? What date? What counts as leakage or debt? Is there a working-capital peg, and how was it set?

A calm answer to those questions is a good sign. Vague answers, or a suggestion that “the lawyers will sort the mechanism later,” are a reason to slow down.

What we look for as a buyer

As a long-term buyer, we care that the mechanism matches the business. We would rather lock a clean recent balance sheet than invent complexity. If completion accounts are the honest fit, we want definitions an ordinary finance director can apply without a fight.

If you are weighing an approach and want a private view of how locked box or completion accounts would land for a firm like yours, a short conversation is enough to start. Nothing needs to leave that room, and there is no obligation either way.