Why purchase-price mechanics often lead to disputes

The choice is an allocation of economic risk

A locked-box structure transfers economic risk to the buyer at an agreed locked-box date before legal completion. The purchase price is fixed by reference to accounts at that date, subject to a promise that value will not leave the target for the seller's benefit other than through permitted leakage. Completion accounts transfer that risk later, because the price is adjusted by reference to the target's financial position at completion.

Neither mechanism is simply a matter of house style. A locked box can provide price certainty and a shorter post-completion process where the accounts are reliable and the period to completion is manageable. Completion accounts can be more appropriate where value changes materially before completion, the business has volatile working capital, or financing and regulatory conditions make a long gap less predictable.

Disputes often focus on price adjustment, particularly where valuation gaps are wide and financing is harder to obtain. That makes the detailed calculation provisions commercially central. The mechanism should be chosen in the term sheet and then carried consistently into the SPA, the financing documents and any deferred consideration arrangements.

Locked-box protection is in the leakage schedule

Leakage describes value transferred from the target to a seller or a connected person between the locked-box date and completion. It commonly includes dividends, distributions, management charges outside agreed arrangements, transaction bonuses, waivers, loans and transfers of assets for less than value. The definition needs to capture substance as well as form, otherwise a payment can sit outside a narrow list while producing the same economic result.

Permitted leakage is the agreed exception. It may include a specified dividend, salary or bonus under existing arrangements, agreed advisory fees or payments listed by amount and recipient. The schedule should distinguish ordinary-course payments that are genuinely part of operating the target from payments for the seller's benefit, so that routine payroll or supplier payments are not inadvertently caught.

A pre-completion dividend must also be capable of being made under the distribution test in art. 2:216 DCC. Board approval, the balance-sheet position and the reasonably foreseeable ability of the BV to continue paying its due debts are relevant to that test. The SPA cannot convert an unlawful distribution into permitted leakage merely by giving it that label.

The leakage indemnity should state whether recovery is euro for euro, who may claim, how tax is treated, whether a de minimis applies and whether the liability limitations apply. It should sit alongside a clear information obligation and a notice process, rather than relying on a generic warranty claim procedure. An indemnity that is fixed to the amount leaked is often more workable than a damages formulation requiring a separate valuation exercise.

Completion accounts need a hierarchy and a timetable

Completion accounts begin with the accounting policy hierarchy: specific SPA policies first, the target's historic policies second, and the applicable reporting framework third. The provisions should then define cash, debt, debt-like items and normalised working capital. Each definition should identify which balance-sheet items count, how they are valued and whether the relevant amount is gross or net of tax.

Debt-like items often produce the most difficult boundary questions. Accrued bonuses, unpaid transaction costs, customer advances, deferred tax, lease liabilities, factoring, derivatives and shareholder balances may be economically similar to debt without being labelled as borrowings in the accounts. The SPA should deal with each item expressly where it is material, rather than leaving the outcome to a general accounting label.

Normalised working capital requires both a formula and a target. The target may be based on a trailing average, seasonality, a budget, or a specified amount agreed after analysis of the accounts. A target that is not matched to the target's historic trading pattern can shift value through the price adjustment even if the completion balance sheet has been prepared correctly.

The procedure should allocate preparation, review and determination. It should provide dates for the buyer's draft accounts, the seller's objections, exchange of information and referral to an independent accountant. The accountant's remit, cost allocation, ability to request information and status of the resulting determination should be specified as a contractual determination procedure, in which it matters whether the outcome has the character of binding advice.

Hybrids and security require one consistent model

A locked box can sit alongside an earn-out and a vendor loan, but each element needs an interface provision. The same euro should not be counted both as leakage and as an earn-out cost, or both as completion debt and a vendor-loan repayment. A transaction schedule that follows cash flows from locked-box date to final payment can expose these overlaps before signing.

Deferred consideration, retentions and escrow arrangements can protect an agreed claim route, but they are not substitutes for defining the underlying obligation. The SPA should state when an amount is released, who gives the release instruction, how a disputed amount is reserved and whether interest accrues. Contractual set-off also merits express treatment, particularly where the statutory right of set-off could otherwise be invoked against a payment obligation.

The commercial profile remains relevant. A founder-led seller may value a fixed locked-box price, while an investor may accept completion accounts where the business is capital intensive or the timetable is long. Debt-financed buyers must also test whether funding documents permit the proposed leakage, price adjustment and deferred payment mechanics.

A decision tree for selecting the mechanism

The following decision tree is a useful starting point, not a substitute for analysis of the business and financing. A transaction with reliable recent accounts, a short signing-to-completion period and predictable working capital generally points towards a locked box. A transaction with a longer condition period, material working-capital movements, uncertain debt-like items or acquisition financing dependent on completion figures generally points towards completion accounts.

Transaction size affects the proportionality of the process. For a smaller transaction, a simple locked box with a tightly listed permitted-leakage schedule may avoid a costly post-completion exercise. For a larger or debt-financed transaction, detailed completion accounts and an independent determination process may be justified where the potential adjustment exceeds the cost and delay of the machinery.

A hybrid should be used only where its components have separate purposes. A locked box can fix enterprise value, an earn-out can price future performance and a vendor loan can defer funding, but the SPA must identify the distinct cash flows, priority and no-double-counting rules. Clear drafting at this stage is the practical answer to a later argument about which mechanism was meant to bear a particular item.