The Role of Warranties and Indemnities in Protecting Buyers in Acquisitions
When purchasing a business/shares, buyers want assurance that they will be getting what they pay...
Corporate and Commercial
In the context of mergers and acquisitions (M&A), precision in financial matters is paramount, especially when it comes to establishing the purchase price. One method that can be attractive to buyers and sellers for its simplicity and transparency, is the use of "Locked Box Accounts." In this blog post, we will delve into the essential elements of Locked Box Accounts and examine how they provide an alternative to completion accounts in the context of M&A transactions.
At its core, the Locked Box mechanism is a method for setting the purchase price of a target company by considering its financial viability at a specific date before the transaction's completion. This predetermined date is aptly referred to as the "Locked Box date."
On the Locked Box date, the company's assets, liabilities, cash, and debt are evaluated, and specific items, such as cash and debt, are "locked" to determine the purchase price. The purchase price is set based on the financial position of the target company as of the Locked Box date.
Importantly, once the Locked Box price is determined, there are typically no post-closing adjustments, providing both buyers and sellers with price certainty and streamlining the M&A transaction process. You can however include the concept of a “profit ticker” or daily interest payment to compensate sellers for profits between the Locked Box date and completion but this is typically at a pre-determined fixed rate thus adding to the certainty.
In contrast, Completion Accounts determine the purchase price based on the target company's actual financial position as at the completion date, usually the transaction's closing date. This approach allows for adjustments based on the company's financial status at the handover.
While Locked Box Accounts offer several advantages, there are considerations to keep in mind:
In conclusion, Locked Box Accounts are increasingly being seen as a viable alternative pricing mechanism for their efficiency, transparency, and deal certainty. While they may not be suitable for every transaction, they offer a compelling alternative to traditional Completion Accounts.
For precise and tailored guidance on Locked Box Accounts transactions, or generally in relation to any other corporate matter, please call Sarah Ward, a Partner in our Corporate Team, on 01384 340 596 or e-mail Sarah at sward@georgegreen.co.uk for advice and assistance.
Contact our offices
Make an enquiry