Locked Box vs. Completion Accounts in M&A
Understanding locked box and completion accounts mechanisms in M&A deals: how they work, their pros and cons, and their impact on the TS analyst's work.
The choice between a locked-box mechanism and a completion accounts mechanism is one of the most important structural decisions in any M&A transaction. As a TS analyst, you will work on deals with both structures — and you should be able to explain the differences fluently in an interview.
Completion Accounts
Under a completion accounts mechanism, the deal price is determined at signing based on an estimated balance sheet (often using the last available accounts). After closing, a completion balance sheet is prepared, and the price is adjusted based on the actual values of:
- Net debt at closing
- Net working capital at closing (vs. the agreed NWC target)
- Sometimes, other agreed adjustments
How It Works
- Signing: price agreed using estimated figures
- Closing: business changes hands
- Post-closing (typically 30–60 days): buyer prepares draft completion accounts
- Review period: seller reviews, may dispute figures
- Dispute resolution: independent expert if unresolved
- Price adjustment: buyer or seller pays the difference
Advantages
- Price reflects actual financial position at closing
- Protects the buyer against deterioration between signing and closing
- Common in complex or large transactions
Disadvantages
- Post-closing disputes are common and can be costly
- Creates uncertainty — the final price is not known at closing
- Requires significant TS work post-closing to prepare and review completion accounts
Locked-Box Mechanism
Under a locked-box mechanism, the economic transfer date is set at a historical "locked-box date" (typically the last balance sheet date). The price is fixed at signing based on that reference balance sheet, and the buyer is economically exposed from the locked-box date.
How It Works
- Locked-box date set (e.g. last year-end)
- Buyer reviews the balance sheet at that date; net debt and NWC are agreed
- Signing: fixed price agreed — no post-closing adjustment
- Closing: business transfers; seller receives agreed price
Between the locked-box date and closing, the seller must not extract value from the business beyond agreed "permitted leakage" (e.g. normal salary payments, dividends agreed in the SPA).
Advantages
- Price certainty for both parties at signing
- No post-closing dispute risk
- Simpler and faster at closing
- Popular in PE sell-side processes
Disadvantages
- Buyer takes economic risk from the locked-box date
- Seller must police the business between locked-box and closing
- Buyer relies heavily on the quality of the FDD for the locked-box balance sheet
Which Is More Common?
Locked-box is now the preferred structure in PE-backed M&A in Europe, particularly in competitive auctions where certainty of price is valued. Completion accounts remain more common in the US and in certain corporate-to-corporate transactions.
TS Implications
- Under locked-box: the FDD team must scrutinise the locked-box balance sheet date carefully — errors here are not corrected post-closing.
- Under completion accounts: the TS team may be engaged post-closing to prepare or review completion accounts, creating additional revenue for the firm.
Conclusion
Both mechanisms have legitimate uses, and both appear regularly in TS interviews. Knowing the mechanics and trade-offs of each demonstrates deal sophistication.
The Transaction Services Interview Programme (€119.99, one-time) covers completion accounts and locked-box mechanics in detail, with SPA extracts and worked examples. Enrol today.