Share Sale Transactions – Unlocking a locked box

What are the various ways in which a company balance sheet is calculated on a share sale transaction and how does this affect the purchase price paid by the buyer? In this article, Jack Trickett sets out some of the key differences between “completion accounts” and the so-called “locked box” approach – terms commonly employed in share sale transactions – and what these mean in plain English.

Key elements of a share sale transaction

Commonly, when a company’s shares are sold, the principle underpinning the calculation of the purchase price is one which takes into account an equity value of the shares in question but – crucially – subject to the principle that the company is being bought on a “cash free, debt free basis, and subject to a normal level of working capital”. What does this actually mean?

The principle here is that the shares in the company have an intrinsic value which has been agreed between the parties – and the basis of that valuation would be the subject of a whole different article.  The cash free, debt free etc… element, however, refers not to the equity value of the company as such, but to the requirement that most purchasers will have to acquire an entity free of debt, on the principle that surplus cash has been allocated to the sellers (ie they have already earned it – it is theirs), and that the buyer will want to take ownership of a company with a normal level of working capital enabling it to trade day-today in the ordinary course of business. All of this requires the parties to agree on what the target company’s balance sheet looks like on completion.

In practice, therefore, transactions will commonly provide that a purchase price is payable for the shares of the company, often one proportion on completion and subsequent payments subject to deferred payment dates (perhaps contingent on performance targets in the business being achieved).  As regards the balance sheet calculation, this will often be an additional calculation to be made at the point of completion, by reference to either a “completion accounts” mechanism or a “locked box” approach.

Completion accounts v locked box – what is the difference?

Both completion accounts and a locked box approach involve the parties (i.e. buyer and seller) reaching an agreement in relation to the balance sheet position of the target company at the point of completion, and – critically – focussing (generally speaking) on calculating the debt, cash and working capital position of the company.

Completion accounts amount to a set of short-form accounts which are drawn up immediately following completion, and in a manner described in the sale purchase agreement.  They will be prepared on an agreed basis, with one party preparing draft 1 and sending it to the other party for agreement.  Once the various iterations of these completion accounts have been agreed between the parties, a payment adjustment will be made – the buyer will either be required to pay an additional sum to the seller (representing the surplus amount owing once the cash, debt and working capital position have been agreed), or in some circumstances the seller will be required to pay a sum of money back to the buyer.


In simple terms, the “locked box” approach replicates this calculation methodology, but by reference to a date falling before completion.  For example, if a transaction completes on the 1st September, completion accounts will be drawn up immediately after that date, and by reference to the state of the balance position at 1st September.  In contrast, a locked box structure would have the parties agree that the point at which the balance sheet is calculated falls prior to completion – perhaps the 1st July, for example.

It follows from this that there is sometimes there will be a gap between the date of the locked box accounts (1st July in the above example) and the date of completion.  For this reason, provisions are added into the share purchase agreement which provide that the sellers may not extract any value out of the company during this period after the locked box date.  This would prevent (for example) a seller declaring and paying to himself dividends during this period of time, but there would be provision for certain payments to be permitted – for example, payments of salary and remuneration in the ordinary course of business.

Advantages and disadvantages

The broad benefit generally accepted to attach to a locked box approach – which has become the preferred market approach in our experience in recent years – is that there is a clear element of certainty insofar as the negotiation between the parties is concerned.  The locked box calculation has already been carried out, and unless there is a dispute in relation to unauthorised payments made by the seller after the locked box date (and such a dispute is unusual) there is little for the parties to fall out about.  Completion accounts, by definition, are not agreed until after completion – and in some cases – rare but notable – there can be some disagreement between the parties in relation to the outcome of those calculations. We have recently been working on a negotiation where the completion accounts calculation has taken some 15 months to agree – not ideal.


In layman’s terms, all of the above amount to a variety of structures enabling a buyer to ensure that it “inherits” the balance sheet it is expecting to inherit on completion of a share purchase, and from a seller’s perspective ensures that he or she obtains the expected reward upon completion of the share sale.

We hope the above “unlocks” some of the terminology associated with references to completion accounts and locked box structures, but we would be happy to discuss these further with you should you wish.

If you would like to explore any corporate issues further or you would like any advice or assistance with corporate issues, please get in touch with a member of our expert team.



By Jack Trickett