Cookie PolicyWe use cookies to enhance your experience while using our website. We will take your continued use of our website as consent to our use of cookies.

 

      

Legal 500 Awards

Awards

corporate banner

Locked Box Or Completion Accounts?


The concept of completion accounts as a mechanism for determining the actual net asset value of the business to be acquired is a familiar one. However, we have been involved in a number of deals recently which have been structured as a "locked box" as an alternative to completion accounts.

The price to be paid for the target business is a fundamental aspect of any corporate transaction (obviously). Transactions which are structured as an acquisition of shares in a limited company frequently involve either a locked box or completion accounts. One of the key differences between the two concepts relates to the date on which the economic risk transfers from the seller to the buyer.

If the sale and purchase agreement provides for completion accounts, usually the buyer agrees to pay an amount of the consideration at completion based on an estimate of the net asset value of the target at the point of completion. This estimated net asset value is then verified by the preparation and settlement of completion accounts immediately after the deal has completed.  Once the completion accounts are settled, the actual net asset value will be known and the price payable by the buyer to the seller can be adjusted accordingly. There are a number of different factors to consider when negotiating the terms of the completion accounts: should the buyer's or the seller's accountants prepare the first draft of the completion accounts? Should any specific accounting policies be applied to the completion accounts? Once the actual net asset value is known should the price be subject to both upwards or downwards adjustment?

Alternatively, if a locked box mechanism is adopted, this will involve the consideration payable by the buyer being fixed by reference to a particular date prior to completion, usually at the end of a particular month based on the balance sheet of the target business to that point. This is often referred to as the "locked box" date on the basis that the value of the target business is locked by reference to the balance sheet at that date. The buyer will then insist on contractual protections to ensure that the seller does not permit value to "leak" out of the target business in the period between the locked box date and the completion date.

Generally a locked box approach is viewed as being more seller friendly, on the basis that the seller has certainty as to the price that will be payable by the buyer prior to completion, and that amount is not subject to possible adjustment post-completion. Conversely a buyer will normally prefer a completion accounts structure which gives the buyer the opportunity to "test" the estimated net asset value of the target and possibly seek to reduce the price if the completion accounts show that the actual net asset value is less than the estimated net asset value. That being said, the fact that a locked box structure provides certainty as regards funding requirement to the buyer, is not necessarily a bad thing.

Understanding the implications of the various alternative deal structures from the outset is vital whether you are buying or selling.  For further information in relation to this article, please contact Daniel McCormack.

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

Get in Touch

With Lupton Fawcett on your side, you're taking control. Contact us today.

Enquiry Form

Please complete this form to make an enquiry and we will get back to you as soon as we can.

Remember you can still call us on 0333 323 5292 or email us at corporate@luptonfawcett.law

 Yes
 No

Testimonials

  • I have known Dan for a number of years and he has been a valuable source of commercial advice across a wide range of issues.

    Lupton Fawcett Logo
    Lupton Fawcett Logo
    Dirk Mischendahl, Ross and Cashmore Limited; Leeds Ice Cream Company Limited

    Having Giles Clegg acting for us at director level, with this wealth of experience, meant that we were constantly several steps ahead of the other advisers.

    Lupton Fawcett Logo
    Lupton Fawcett Logo
    Henry Robinson
  • Jonathan Oxley is an invaluable sounding board with a can-do attitude.

    Lupton Fawcett Logo
    Lupton Fawcett Logo
    Chambers and Partners

    Andrew and his colleagues at Lupton Fawcett were accessible and they provided us with excellent advice throughout the cross-border transaction. We would recommend the services of Andrew and his team to others.



    Lupton Fawcett Logo
    Lupton Fawcett Logo
    Andrea Pappagallo, Vice President, Federal-Mogul Inc
  • Andrew's involvement in the negotiations helped us secure a very beneficial outcome for both Empowering Wind MFC Limited and Middlesbrough FC.

    Lupton Fawcett Logo
    Lupton Fawcett Logo
    Paul Millinder, Managing Director, Empowering Wind MFC Limited

    Max is an excellent lawyer who knows my businesses inside out and always deal with my requirements promptly, efficiently and I can always rely on him to just 'sort it out' for me.

    Lupton Fawcett Logo
    Lupton Fawcett Logo
    John Hill, Hill Care Group
  • Martin provided not only spot on and instant legal advice, but he also came with a masterful and passionate negotiation technique - I'm glad he was on our side!

    Lupton Fawcett Logo
    Lupton Fawcett Logo
    Richard Hunt, CEO, Agility Multichannel Limited

    Giles and his team were invaluable to us, showing outstanding attention to detail coupled with a commercial and pragmatic approach where necessary.

    Lupton Fawcett Logo
    Lupton Fawcett Logo
    Peter Watson, Managing Partner, Simpson Millar
Get in Touch