When you agree a price for your business, it is usually agreed on a "cash-free, debt-free" basis with a normal level of working capital. That leaves a question: at what moment is the cash, debt and working capital measured? There are two common answers, and they treat you very differently.
Completion accounts
The price is adjusted after the deal, using accounts drawn up as at the day of completion.
- If there is more cash or less debt than assumed, the price goes up. If there is less, it goes down.
- Working capital is compared with an agreed target, often called the peg. A shortfall usually comes off the price pound for pound.
- The accounts are prepared after completion, often by the buyer, and agreed or disputed in the months that follow. Disputes are commonly settled by an independent accountant.
For the buyer, this means paying for the business as it actually is on the day. For you, it means the final price is not known until months after you have sold.
Locked box
The price is fixed by reference to a balance sheet at an earlier date, the locked box date, usually the latest audited or reviewed accounts.
- From that date, you promise that no value leaves the business to you or people connected to you, except payments agreed in advance as permitted leakage.
- Any other leakage is repaid pound for pound.
- There is no adjustment after completion, so apart from any leakage, the price you sign is the price you get.
- Because the business's profits after the locked box date go to the buyer, sellers often negotiate a daily amount, sometimes called a ticker, for that period.
Which one suits you
A locked box needs reliable, recent accounts that a buyer is willing to rely on. That is a preparation point: an owner with clean monthly management accounts and a tidy balance sheet can offer a locked box with confidence, while an owner whose numbers need explaining usually ends up with completion accounts and months of uncertainty.
Either way, agree the mechanism and the working capital level in the heads of terms, not later. These are among the terms explained in our glossary, and your adviser will tell you how they apply to your deal.
Common questions
What is leakage in a locked box deal?
Leakage is value leaving the business to the seller between the locked box date and completion, such as dividends, bonuses or payments to connected parties. It is not allowed unless it is listed as permitted leakage, and the seller usually has to repay it pound for pound.
Which is better for the seller?
A locked box usually gives the seller more certainty, because the price is fixed when the deal is signed. Completion accounts protect the buyer more, because the price is adjusted for the actual position at completion. Which suits you depends on how reliable and recent your accounts are.
General information to help you prepare, not tax, legal or financial advice. Rates and rules change; check the current position and take advice on your own circumstances.
