Completion accounts have been the traditional pricing mechanism used to deal with uncertainty in the valuation of a target company in acquisitions, but the locked box mechanism has become increasingly popular in recent deals.
Using the completion accounts mechanism, a price is agreed to be paid at completion, which is subject to adjustment after completion based on a set of accounts for the target company prepared after completion that confirm the exact financial position of the target on the completion date.
Using the locked box mechanism, the price to be paid on completion is based on the financial position of the target company as set out in a historical set of accounts for the target company. The target company is deemed a 'locked box' from the date of those historical accounts, and the seller agrees to reimburse the buyer in respect of leakage of value occurring between the locked box accounts date and the completion date (e.g. any value extracted by the seller from the target company, for example dividend payments, management charges, transactions at under/over value, etc.).
