Determining The Price Of A Target Business In M&A Transactions: Completion Accounts V Locked Box Mechanisms

One of the most negotiated areas in the private acquisition of a business is the method of pricing the target.

The two most popularly used mechanisms for this are completion accounts and locked box. The completion accounts method gives the parties the opportunity to adjust the price based on the figures in accounts put together after completion, and the locked box method involves a fixed purchase price based on a balance sheet prepared before completion. Completion accounts are seen as more favorable to purchasers and have been traditionally used in private acquisitions of businesses. However, in many other jurisdictions around the world, locked box mechanisms have become popular in share transactions, especially where sellers have the greater bargaining power. It is worth noting that in India, completion accounts mechanisms cannot be put in place for multi-jurisdictional transactions because the regulatory rules do not allow the price to be adjusted post completion without being subject to restrictions. This article sets out the key features of both pricing mechanisms, together with their advantages and disadvantages.

Completion Accounts

In merger and acquisition transactions, historical accounts such as the latest audited accounts or more recent management accounts are used by the parties to come to a conclusion about the value of business. A prudent purchaser would be concerned about figures in accounts changing since the date of these historic accounts. To address this, the parties may agree to a completion accounts pricing mechanism whereby accounts are put together on an agreed date following completion and the purchase price is amended based on the difference between historical accounts and post-completion accounts. Such an adjustment can work both ways or only one way, depending on the bargaining strength of the parties. Completion accounts can range from a balance sheet and profit and loss account, only a balance sheet, or a statement setting out net assets, net cash/debt, or working capital.