Completion Accounts or Locked Box? A shifting dynamic.

A sale process is full of decisions for a seller. Is the headline price fair? Can we accept more deferred consideration? Are we happy that the buyer will pay up or is security required?

The decisions continue right through to negotiating the warranties and indemnities. Yet there is one major decision that first time sellers seem to be mostly in the dark about – the completion mechanism.

It would be fair to assume that the actual method of calculating the price would gain more traction as a key decision in the process. Up until the last few years, Completion Accounts have been the favoured mechanism for most deals in the SME space.

The term Completion Accounts refers to drawing up a balance sheet for the completion date at a later date, usually 1 to 2 months later. The balance sheet is then used to calculate the actual price. In a perfect world this is a sensible approach.

The issue is that this leaves the door ajar to disputes which directly impact the price received for the business. Robust advice on the Completion Accounts schedule can minimise risk but it cannot provide assurance that the Buyer will not interpret matters differently and at the very least, increase costs and cause a delay to payment being received.

Unscrupulous buyers can use the Completion Accounts period to undertake after the fact Due Diligence with the aim of uncovering hidden price chips. We see this happen generally where a seller has not received specialist advice and has attempted to simplify the deal. Unfortunately, a deal does not end at the point of signing the SPA and disputes making their way to expert determination are increasing.

Locked Box can provide the additional security that the name suggests. Rather than retrospectively calculating the price, a date is set as the Locked Box date. This balance sheet is then used as the basis for Due Diligence, with the price being agreed on a balance sheet that all parties agree is fair, in advance of the completion date.

The final price can then be increased for cash generation between the Locked Box date and actual completion. Although there is scope for additional negotiation on this top-up element, having certainty on the vast majority of the price provides a vendor with the comfort required for a more restful sleep.

Locked Box is gaining popularity in deals and is our go-to approach where it is available. In order to be an option, a Company must prepare reliable management accounts on either a quarterly or ideally monthly basis. At the point of the Locked Box date, these management accounts would need to cover at least the last twelve months.

If you are beginning to plan for a future sale, ensuring that your management information is of a good standard is a sensible step.

Ensors Corporate Finance team are experienced in structuring deals and providing advice to company owners starting out on the path to succession.