Why the purchase-price mechanism decides millions
The enterprise value named in the agreement is rarely the amount that ends up flowing. The standard is a valuation on a cash-and-debt-free basis: the buyer acquires the business free of financial debt and surplus cash. From the enterprise value one reaches the actual equity value by deducting net financial debt and adjusting for working-capital deviations. The question of which reference date and logic applies is answered by two competing mechanisms: locked box and closing accounts.
This choice is no formality. It allocates economic risk between signing and closing and determines how quickly the seller has certainty about the proceeds. A careful sale preparation clarifies this early.
Closing accounts: settlement at the completion date
With closing accounts the final price is determined only after completion, based on a balance sheet drawn up at the closing date. At signing the buyer pays a provisional price based on estimates. After closing the actual figures for net financial debt and working capital are established and the price corrected up or down via a purchase-price adjustment.
The advantage is accuracy. The downside is effort: preparing the closing balance, reviewing it and disputes over individual items, particularly net working capital, can drag on for months. Our article on working-capital mechanisms in the agreement goes deeper here.
Locked box: a fixed price from a past reference date
The locked box reverses the logic. The price is fixed on the basis of an already available, audited balance sheet at a past date, the locked-box date. From that date the economic result already belongs to the buyer, even though completion follows later. There is no subsequent adjustment; the price is fixed at signing.
The buyer is protected by leakage-protection clauses prohibiting any unjustified outflow of value to the seller between the locked-box date and closing, such as dividends or excessive remuneration. Permitted leakage is defined conclusively. As compensation for the time between date and closing, the seller is often granted a value accrual.
Risk allocation and practical recommendation
The central difference is the allocation of economic risk. Under locked box the buyer bears the full business risk from the reference date but also benefits from positive developments. Under closing accounts the risk stays with the seller until completion. Sellers therefore usually prefer the locked box: it creates price certainty, avoids lengthy renegotiation and enables a clean break, especially valued in auctions and private-equity deals.
Closing accounts are preferable where the figures are volatile or the last audited balance sheet is outdated. A prerequisite for a locked box is always a robust, recent and ideally audited balance sheet at the reference date.
FAQ
Which mechanism is more seller-friendly? Usually the locked box, because the price is fixed at signing with no adjustment. It requires a recent, audited balance sheet.
What is leakage? Any economic value flowing from the company to the seller after the locked-box date that is not expressly permitted, which the seller must reimburse.
How long does a closing-accounts settlement take? Several weeks to months, depending on complexity. Clear accounting policies in the agreement shorten it.
30-day implementation plan
Week 1: Review the currency and quality of available balance sheets and determine whether a robust reference balance sheet for a locked box is available.
Week 2: Analyse net working capital of recent months, assess seasonality and volatility and derive a reference value.
Week 3: Decide the mechanism; for locked box define the leakage catalogue and value accrual, for closing accounts the accounting policies and adjustment mechanism.
Week 4: Reflect the chosen price formula in the draft agreement, review with the advisor and set the negotiation strategy.