Lifecycle of a business – Pricing the deal

• 17 July 2025
• News

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

We’ve considered the main aspects of the lifecycle of a business from the beginning and you now want to sell….

Pricing the deal

The price is the fundamental term of any M&A transaction. A seller will be keen on price certainty, whereas a buyer will often want to know they’re getting value for money. In addition, how the price is structured may depend on how aligned the parties are on the headline value and whether the buyer is keen to retain, for example, owner managers in the longer term.

This article focuses on price and value certainty by considering the key features of completion accounts and locked box pricing mechanisms. Deferred payment structures and earn-outs (often used to allow for any valuation gap to be bridged based on future performance or to otherwise incentivise retention of key individuals during a post-closing integration period) are outside the scope of this article.

Completion accounts

In a completion accounts deal, the sale agreement will typically provide for an initial purchase price payment to be made on closing (based on estimated numbers), with a post-closing adjustment made in accordance with an agreed ‘equity bridge’, that is, the adjustments to the enterprise value / headline price to be made to reach the ‘equity value’, being the value available to the target group’s shareholders. 

The equity bridge will often be a cash free debt free adjustment, with a working capital adjustment, or a net assets adjustment (the latter commonly seen, for example, in corporate real estate transactions).

Looking at a cash/debt/working capital adjustment, this would customarily look like:

There may be other fixed transaction specific adjustments too.

With this structure, the economic risk passes to the buyer on closing, and there is less price certainty for a seller due to the post-closing adjustment, particularly on a conditional deal. This aspect of completion accounts is unappealing for sellers, particularly those with stakeholders such as private equity investors.

The parties will have to negotiate what should form each element of the closing accounts; for example, is there any restricted cash which the business cannot utilise? and, if so, is this to be excluded from any definition of ‘cash’?

A buyer should always consider whether it makes sense to pay cash for cash given stamp taxes or whether they should seek for the sellers to carry out a cash sweep to an agreed level pre-closing.

Locked box

In contrast, a locked box mechanism involves the parties agreeing the price before signing, requiring detailed analysis of the equity bridge and the underlying financial accounts – the locked box accounts – before signing. There is then no post-closing adjustment. Economic risk therefore passes on the locked box accounts date and the sale agreement should contain provisions to prohibit and allow pound for pound claims if there is ‘leakage’ of value from the target group to the sellers, unless such leakage is ‘permitted leakage’.

Leakage would often include a seller receiving dividends, management charges or supervisory fees (or similar) and transaction bonuses, as well as, for example, assets transferring to the seller, guarantees being provided in favour of a seller by the target, forgiving debt, or the target suffering tax in relation to any such item. Transaction costs payable by the target should also be factored in as it is for the benefit of the seller indirectly.

Permitted leakage is amounts which are allowed to go to the sellers, either due to a specific agreement (for example, for the target to pay a certain amount of advisory fees (which a buyer will likely want capped)) or which are made in the ordinary course of business, such as, the payment of employees’ salaries.

In addition to the locked box price, sellers of profitable businesses will seek compensation for the period from the locked box date to closing, to reflect that they have been running the business. This is the ‘value accrual’ or ‘profit ticker’.

Which to choose?

There are pros and cons of both mechanisms, and we have summarised some of these below.  We often see completion accounts used in a buyer driven market (other than in an auction process).

Completion accounts

Locked box

Disclaimer

This note reflects the law as at 15 July 2025. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.