Keep reading
Blog/Investment Banking
A locked box and completion accounts are the two standard purchase price adjustment frameworks in M&A. Both answer the same question, what equity value should a buyer pay once cash, debt, and working capital are reflected. However, they answer it at different points in time and shift economic risk differently between signing and closing. For finance professionals, that choice matters because it changes bid strategy, financing certainty, modelling assumptions, and the odds of a post-close dispute that erodes deal value after the announcement.
The basic trade is certainty versus precision. Under a locked box, price is fixed by reference to a historical balance sheet at a stated date. Under completion accounts, price is provisional at signing and adjusted after closing using accounts prepared at completion. Sellers usually prefer certainty. Buyers usually prefer precision. The real task is deciding when one is worth more than the other in a live process.
A locked box fixes the price earlier. Value is measured using a historical balance sheet, and from that date forward the business is treated economically as the buyer’s, even though legal title stays with the seller until completion. The seller agrees not to extract value except for specifically permitted items. Any prohibited extraction is leakage, and it is usually reimbursed dollar for dollar.
Completion accounts fix the price later. The buyer pays an estimated price at closing, then the parties reconcile actual cash, debt, and working capital against agreed targets once completion accounts are prepared. That means the final price reflects the company’s actual financial position on the day control transfers.
This distinction sounds simple, but it drives real execution choices. A locked box works only if the buyer can underwrite the historical bridge with confidence. Completion accounts work only if both sides are willing to tolerate a post-close accounting process that can consume time, fees, and management attention.
Locked box pushes the hard work before signing. Sellers need quality accounts, a debt-like items analysis, a clear leakage perimeter, and strong vendor diligence before the process opens. Buyers need to test the historical bridge, question unusual movements, and get comfortable that the business delivered at closing will look close enough to the business priced off the locked box date.
That front-loading can improve process efficiency. In competitive auctions, a fixed historical price gives sellers cleaner bid comparison and lets buyers submit tighter offers with fewer open accounting points. This is one reason locked box remains common in sponsor exits and fast-moving auctions linked to a sell-side M&A process.
Completion accounts move the burden after closing. Finance teams must prepare, review, and often dispute post-close accounts over weeks or months. That is not just an adviser cost. It can delay final proceeds, require holdbacks, and pull management away from integration during the first hundred days.
For buyers, that back-loaded precision can still be worth it. If working capital is volatile, capex is lumpy, or intercompany balances distort the balance sheet, paying a provisional price and trueing up later may be the only way to avoid overpaying on day one.
Leakage is the commercial heart of a locked box. It typically includes dividends, management fees, shareholder loan repayments, related-party payments, transaction bonuses borne by the target, and asset disposals below market value. Permitted leakage usually covers agreed salaries, arm’s-length ordinary course payments, specific restructuring steps, and disclosed transaction expenses.
The real issue is not whether leakage exists in theory, but whether the interim period can move value in ways the leakage concept does not catch. If the locked box date is old, seasonal working capital swings, tax payments, capex timing, and uneven cash generation can change economics without fitting neatly into a leakage claim. In that setting, a fixed historical price can become a valuation risk dressed up as certainty.
Completion accounts place that risk closer to legal ownership. Because the final price is tied to actual completion numbers, the mechanism is better suited to businesses where value moves materially between signing and closing. That does not make it automatically buyer-friendly. It simply means the price is calibrated later.
Completion accounts often replace one valuation debate with several narrower accounting debates. Net debt sounds intuitive until the parties ask what counts. Lease liabilities, customer deposits, accrued bonuses, deferred revenue, factoring, unpaid capex, tax liabilities, FX hedging, and drawn letters of credit can all move the result.
Working capital creates even more friction. The parties need to define which lines are included, what accounting principles apply, and whether consistency with past practice overrides GAAP or IFRS presentation. Small definitional shifts can materially change the equity check, especially in lower-margin or inventory-heavy businesses.
Buyer control is the awkward feature many teams underestimate. In a completion accounts structure, the buyer owns the target before the final adjustment is set. That means the buyer controls the books used to calculate the price it owes. Sellers therefore need protections around consistency and access. Buyers, on the other hand, need room to integrate without inviting claims that every operational decision distorted the true-up.
For finance teams, the lesson is practical. If the accounting hierarchy and adjustment mechanics are vague, the post-close process can become an avoidable drain on value. If they are clear, completion accounts can produce a tighter price with less noise.
Locked box fits stable businesses with reliable reporting and a short route to closing. It performs well in recurring revenue software businesses with understood deferred revenue, limited inventory, and low capex. It also fits sponsor exits where process speed, financing certainty, and clean bid comparison matter as much as theoretical pricing precision.
A buyer should treat any ticking fee, meaning compensation to the seller for profits accruing from the locked box date, as a valuation input rather than a custom. If the business is cash-generative and the locked box date is recent, a modest charge may be acceptable. If earnings are volatile or capex is heavy, a formula that assumes smooth value accretion deserves skepticism.
Completion accounts fit businesses with genuine balance sheet uncertainty. Carve-outs are the clearest example because stand-alone accounts may be weak and intercompany balances, treasury arrangements, tax sharing, and transitional services can distort both debt and working capital. In those situations, a fixed historical price often creates false comfort. For more on separation complexity, see this guide to carve-out transactions.
Cross-border deals also lean toward completion accounts when accounting judgments differ meaningfully across reporting frameworks. If the parties are already aligned on the reference accounts, a locked box can still work. If not, later measurement may be safer. That issue often appears in cross-border M&A where accounting and timing complexity rise together.
Long sign-to-close periods also weaken locked box. If antitrust, foreign investment, or consent processes are likely to delay completion by months, a historical locked box may stop reflecting the business actually delivered. In those cases, insisting on completion accounts is often correct pricing, not excessive caution.
The mechanism should change your model, not just your SPA markup. In a locked box deal, sources and uses are cleaner because the equity check is known at signing. That can simplify lender underwriting and reduce uncertainty in leverage metrics. In a completion accounts deal, the model should include a range for working capital and net debt outcomes, because the final purchase price is not fully known at close.
A practical rule helps here. If working capital can move equity value by an amount large enough to change your return case, lender headroom, or bid ranking, the price mechanism belongs in the IC memo summary, not buried in legal diligence. Analysts and associates should also flag whether the business has seasonal cash swings, deferred revenue complexity, or debt-like items that make a narrow locked box bridge hard to defend. That is where financial modelling for M&A valuation becomes a decision tool rather than a presentation exercise.
Warranty insurance does not solve this choice. In a locked box, coverage may not protect against what is really a pricing dispute. In completion accounts, the true-up sits outside the warranty regime because it is part of the price mechanism itself. Teams should not assume insurance fills drafting or diligence gaps.
The right answer in locked box vs completion accounts depends on whether you can price the business with confidence today or need the mechanism to reveal value later. For finance professionals, that means linking the choice directly to underwriting quality, close timing, leverage tolerance, and dispute risk. In stable, well-documented, short-dated deals, locked box is often the cleaner bid. In carve-outs, volatile businesses, or long-dated regulated deals, completion accounts are often the more accurate one.
P.S. – Check out our Premium Resources for more valuable content and tools to help you break into the industry.
Join 80,000+ readers
One email a week: markets and finance news, the latest M&A deals and reports, investor biographies and deep dives.
Free forever. Unsubscribe anytime.
