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.

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.

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