Locked box and completion accounts

In Europe’s competitive M&A landscape, besides the purchase price itself, the completion mechanism is also critical in shaping certainty, speed, and control between signing and closing.

Across European transactions, choosing between a locked box and completion accounts approach dictates when economic risk transfers, how price certainty is achieved, and how negotiation unfolds.

Locked box fixes the price at a historical “locked box date,” with value accrual and leakage protections agreed upfront; from that date the buyer is treated as owning the economic upside and downside, while the seller keeps operating the business until completion. The price is not reopened later, and the buyer instead relies on covenants, warranties and anti-leakage protections to ensure no value has been extracted in the interim.

Completion accounts agree a headline price at signing but only finalize the equity value after closing, once completion-date accounts are prepared and tested against agreed policies, with adjustments for net cash/debt and working capital. Here, the purchase price moves up or down after completion to reflect the actual financial position at closing. 

Under a locked‑box mechanism, the deal value is fixed as at the locked‑box date; accordingly, the reliability of the financial statements at that date and robust controls to prevent value leakage between the locked‑box date and completion (including a clear definition of leakage and appropriate covenants) are critical.

Locked box suits standalone businesses with discrete systems, reliable effective-date financials (ideally audited or independently reviewed), predictable working capital and cash generation, and short intervals between economic transfer and completion. This structure delivers price certainty by fixing value at a historical date and limiting post-closing adjustments to the defined leakage. That’s why it is frequently preferred in competitive sales processes. As the buyer takes over the economic risk from the locked box date, the SPA definition of “leakage” becomes the key lever. While core items (e.g. dividends, management fees, shareholder loans, major asset transactions) are common across all deals, the scope of “leakage” needs to be adapted based on the industry and context of the transaction as well:

In this context, the conclusions of financial due diligence and any associated red flags (e.g. intra‑group trading, historical cash extraction, off‑market terms or weak controls) should directly inform the drafting of the leakage definition. Where these risks are more pronounced, the leakage provisions should be tailored to reflect relevant sector‑specific and entity‑specific considerations.

Under a completion accounts mechanism, it is essential for both parties to clearly agree on fair classification of each balance sheet item and potential off-balance sheet item, together with a clear route to adjusting the purchase price if needed.

Normally, completion accounts are a better fit for businesses with seasonal or volatile performance, lots of intra‑group trading, weaker controls, longer closing periods driven by multiple approvals, and complex carveouts. In these situations, getting the final price right at closing using agreed net debt and working capital true‑ups can be worth the extra time and advisory cost. When merger review extends the signing‑to‑closing window, it helps to align the price mechanism with regulatory phases and timelines.

Under a completion accounts mechanism, a critical requirement is to have clear, precise and consistently applied definitions and methodologies for the financial items that drive the post‑closing price adjustment – typically net working capital, cash, debt and net debt. As the purchase price is adjusted to reflect the target’s actual financial position at closing, any ambiguity in item definitions, accounting policies (including GAAP applied), estimation techniques or calculation procedures can give rise to disputes between buyer and seller. It is therefore essential for both parties to clearly agree on fair classification and measurement of each balance sheet item and potential off-balance sheet item, with a clear route to adjust the purchase price if necessary, with the assistance of experienced financial advisors.

For example, the definition and benchmark chosen for net working capital (NWC) in a price‑adjustment mechanism can materially affect the purchase price. In industries with pronounced seasonality – such as retail, where different consumer products follow distinct seasonal cycles – it is often fairer to use a recent monthly average NWC as the benchmark rather than an annual snapshot at a single date, which can obscure seasonal effects. Likewise, certain economically related items are commonly excluded from NWC in practice: for example, capex prepayments in real estate made to ready a property for sale are typically excluded from NWC and from the purchase‑price calculation.

Choosing the purchase‑price mechanism is as consequential as negotiating the headline price: it determines when economic risk transfers, how price certainty is achieved, and who bears post‑signing exposures. There is no one‑size‑fits‑all solution – a locked box mechanism typically suits stable, well‑controlled businesses where speed and certainty matter, while completion accounts better protect buyers in volatile, complex or carve‑out situations.

Besides locked box and completion accounts, earn-outs can be implemented in parallel to transfer the risks and benefits before completion date directly to the seller, using specific transfer mechanisms. We will provide further insight on this topic in a future article – watch this space!

Whatever mechanism you choose, the close involvement of an experienced financial advisor is essential to tailor definitions (leakage, NWC, net debt), validate the relevant financials, and design robust calculation and dispute‑resolution procedures that reflect regulatory and market realities. With the right pricing mechanism and expert financial support, parties can align commercial expectations, reduce execution risk, and increase the likelihood of a smooth, value‑preserving closing.