Locked Box vs. Completion Accounts: How Do They Differ and Which Mechanism Is Right for Your Deal?
When selling a company, one of the key transaction questions is how the purchase price will be settled between the seller and the buyer. In practice, two main approaches are most commonly used – locked box and completion accounts. Both mechanisms have their advantages and risks, and choosing the right one can have a major impact on the outcome of the transaction.
Completion Accounts – a traditional and detailed approach
How it works:
The purchase price is initially determined based on estimates (e.g. enterprise value minus net debt and working capital target). After the transaction closes, completion accounts – financial statements as of the closing date – are prepared. Based on these, the purchase price is adjusted retrospectively to reflect the actual level of net debt, working capital, and cash.
Advantages:
- Accuracy – the price reflects the company’s true position on the closing date.
- Fairness – both parties share the risks and benefits of changes up to the final moment.
- Suitable for businesses with significant seasonal or volatile movements.
Disadvantages:
- More complex and time-consuming process (financial statements, audits, discussions).
- Potential disputes over accounting interpretations.
- Higher transaction complexity and cost.
Locked Box – a faster and more predictable solution
How it works:
The purchase price is based on historical financial statements (e.g. as of 31 December of the previous year). From that date, the company is “locked” and the seller commits not to extract any value from it (known as leakage). The buyer therefore knows the exact price at signing, and no further adjustments are made after closing.
Advantages:
- Simplicity and speed – no lengthy post-closing calculations.
- Price certainty – both parties know the final price in advance.
- Less room for disputes.
Disadvantages:
- Risk for the buyer – if the company’s financial situation changes significantly between the locked box date and closing, the buyer bears that risk.
- Dependence on the quality of historical financial statements.
- Need for strong warranties and protections against leakage.
Which approach to choose?
The choice depends on the nature of the business and the negotiating position of the parties:
- Completion accounts are more common for complex or riskier businesses, where the buyer prefers not to bear risks arising before closing.
- Locked box is preferred by sellers, especially for stable companies with predictable cash flows, where quick and efficient completion is desired.
In practice, locked box mechanisms are increasingly dominant in European transactions, especially in private equity, thanks to their speed and simplicity. However, completion accounts remain a suitable tool where higher precision and fair risk allocation are required.
Conclusion
Locked box and completion accounts represent two distinct approaches to purchase price adjustment. Neither is universally better – the right choice always depends on the transaction structure, the company’s stability, and the relative bargaining power of the buyer and seller.
For business owners preparing for a sale, it is essential to understand these mechanisms in advance and choose the one that best supports their goals.
If you are planning to sell your company and want to ensure that the selected settlement mechanism protects your value, MONTWARD will be glad to guide you through the process.
