09/10/23
So you’ve found a buyer for your business, now it’s time to decide which completion mechanism is right for you.
There are two main completion mechanisms; Completion Accounts and Locked Box. The benefits of each will vary on a case-by-case basis, and should be considered carefully before making a final decision about which route is best for your business sale.
At mgr we guide our clients through the entire process of selling their business, right up to completion. With this in mind, we have broken down the key advantages and disadvantages of both Completion Accounts and Locked Box in the table below, to help establish which makes the most sense for your sale.
| Aspect |
Completion Accounts |
Locked Box |
| Mechanism |
- Seller and Buyer agree a preliminary purchase price by agreeing an estimate of the equity value at completion.
- Following completion, one of the parties is obliged to draw up completion accounts to determine the actual equity value at completion.
- The other party then has the opportunity to review and either accept or dispute the completion accounts. A dispute resolution mechanism is typically incorporated in the SPA.
- Once both parties agree, and the final purchase price is established, the difference between this figure and the original estimated price is settled through a purchase price adjustment.
|
- Both parties agree on a final purchase price using financial information at a given date – the Locked Box Date (‘LBD’).There is no post completion adjustment.
- As completion will take place after the LBD, the Buyer will seek to safeguard the value of the acquisition in the intervening period (Locked Box Period) by including obligations in the SPA to:
- indemnify the Buyer for any leakage or extraction of value (e.g. the Seller paying bonuses/dividends)
- ensure the Seller maintains trading activity and performance.
- If the Seller continues to support the business during the locked box period, the Seller may seek some form of compensation, such as interest on the purchase price, for an increase in value that happens during this period.
|
| Advantages |
- Accuracy of purchase price – the consideration is matched to the value at completion i.e., ‘you pay for what you get’.Removes the risk of adverse value shift which can occur in the Locked Box mechanism.
|
- Provides a more straightforward approach as the price is agreed upfront.Typically allows for a swifter completion process.
- In a bidding auction scenario, offering a Locked Box approach can provide a competitive advantage to the Buyer – price certainty, a leaner transaction process and less likelihood for disputes are typically plus points for the Seller.
|
| Disadvantages |
- As the final price needs to be determined post completion, it adds complexity and cost to the transaction. Resources of the Buyer are required to deal with this process which may be better deployed on onboarding the acquisition.Higher risk of disputes as parties may not agree on the price adjustment. This may require a dispute resolution process adding cost and time to the transaction.
- A Completion Accounts mechanism may be less attractive for the Seller and therefore may disadvantage the Buyer in a bidding auction.
- As the final price is not known, the Buyer has to factor in providing for a ‘true-up’ which may present difficulties if external financing is required for the acquisition.
|
- Risk of disconnect between the purchase price (agreed at LBD) and value at completion. The SPA therefore needs to include robust provisions for value leakage – i.e., the ‘box is effectively locked’.Notwithstanding the above, adverse value shift can occur and Locked Box may not be appropriate where the working capital or performance of the target company is subject to volatility since this cannot entirely be hedged for in the SPA.
- May not be appropriate if Buyer has been unable to perform full due diligence at the LBD, as there will be little, if any, opportunity to adjust the proceeds post-completion.
|
Our team understands the importance of forming a solid plan for your business sale, and are on hand every step of the way to make sure that it is tailored to your needs.
If you would like to discuss completion mechanisms in more detail, then please do not hesitate to get in touch with Tim Sharman at tim.sharman@mgr.co.uk or on 020 7644 9618.
