Purchase Price Mechanics in a Company Sale: Locked Box, Closing Accounts and Holdbacks

Two buyers offer the same amount. After completion, different sums reach you.

For owners running an actual process, our approach to selling your company sets out how the mandate works.

That has nothing to do with negotiating skill. It comes down to the purchase price mechanics — the part of the sale and purchase agreement that governs how the stated enterprise value becomes the amount that actually lands in your account.

This part is rarely discussed first. Yet it regularly decides more money than the final round on the multiple.

Why the price quoted is not the price paid out

Offers in a company sale are almost always expressed as enterprise value: the value of the operating business, irrespective of how it is financed.

What you receive as seller is the value of your shares — the equity value. Between the two lies a bridge.

Put simply: financial debt is deducted from enterprise value and cash is added back. On top of that come adjustments for working capital that deviates from a normal level and for items the buyer treats as debt-like.

It is precisely in those adjustments that the room for negotiation sits. The detail on net debt is set out under net debt.

The usual framework is called cash and debt free: the buyer takes over the company without cash and without financial debt. What counts as debt is a matter of definition — and questions of definition are won by the side that raises them first.

What buyers regularly want treated as debt-like. Pension provisions. Deferred maintenance and capital expenditure backlogs. Unpaid bonuses and holiday accruals. Leasing and rental obligations. Shareholder loans. Tax exposures from open audits. Unpaid dividends. Factoring lines.

Every one of these items reduces the amount that reaches you. None of them is self-evidently right or wrong — they are negotiable, as long as they are not yet written into the agreement as a definition.

Locked Box: the effective date lies in the past

Under a Locked Box, the price is determined on the basis of accounts that already exist — the last annual financial statements, for instance. From that date onwards, the company is treated economically as being run for the buyer's account.

The price is therefore fixed. There is no subsequent adjustment.

For this to work, the seller undertakes not to extract value from the company between the locked box date and completion — no distributions, no special payments, no transactions on non-arm's-length terms. These prohibited outflows are usually called Leakage in the agreement. Expressly permitted exceptions — the ongoing managing director's salary, for example — are called Permitted Leakage and should be listed individually.

Because the buyer bears the business economically from the locked box date, the seller regularly asks for interest on the purchase price for the period up to completion.

In favour, from a seller's perspective: the price is known from signing. There is no months-long argument about completion figures afterwards. The workload after closing is minimal.

Against: if the business performs exceptionally well between the locked box date and completion, the buyer takes the benefit. And the buyer's review of the locked box accounts will be correspondingly thorough — that is the price of certainty.

The Locked Box requires robust accounts, ideally audited. It works badly where the last set of accounts is more than a year old or where figures swing sharply during the year.

Closing Accounts: the effective date is the completion date

Under the Closing Accounts mechanism, the buyer first pays a provisional purchase price. After completion, interim accounts are drawn up as at the completion date. The actual figures for net debt and working capital are compared with the estimates, and the purchase price is adjusted.

The advantage is accuracy: both sides work with the figures as at the day the company changes hands.

The disadvantage lies in everything else. The interim accounts are prepared by the side that by then controls the company — the buyer. Accounting judgement now works in his favour. The dispute over the adjustment often drags on for months, and the seller negotiates from a weaker position because he no longer has access to the records.

Where Closing Accounts are agreed, three points are essential: a clear rule on who prepares the accounts and under which accounting principles, a deadline for objections with full inspection rights for the seller, and a named independent expert to determine any dispute.

Without those three points, the adjustment clause is an open account at the seller's expense.

Working capital: the figure most often renegotiated

The buyer expects to take over a company with a normal level of inventory, receivables and payables — enough to keep the business running without immediate refinancing.

A target figure is agreed for this, the Target Working Capital. If the actual figure at the effective date falls below it, the price falls; if it exceeds the target, the price rises.

The question is: what is normal?

Buyers frequently propose the average of the last twelve months. In a seasonal business that can work systematically against you if completion falls in a month with high inventory.

More robust is a view across a full cycle, with month-specific target figures where appropriate. Anyone who can evidence their own working capital curve over 24 to 36 months negotiates this point on the facts. Anyone who cannot does not negotiate it at all — they accept the buyer's proposal.

Settle as well what falls within the definition: are provisions included? How are overdue receivables valued? What applies to slow-moving inventory? Every one of those questions is worth a specific amount.

Holdbacks, escrow and liability for warranties

In the sale agreement you give warranties — on the balance sheet, taxes, contracts, employment relationships, litigation. If a warranty later turns out to have been inaccurate, you have to answer for it.

Buyers secure that liability. The three usual routes:

Holdback. Part of the price is retained and paid out only after a defined period.

Escrow. Part is placed in a trust account over which both sides can only act jointly. That is safer for the seller than a simple holdback, because the money is beyond the buyer's reach.

W&I insurance. An insurer assumes liability under the warranties. The seller then remains liable only for a nominal amount and for cases of fraud. The premium is usually paid by the buyer, or shared. In mid-sized transactions this has become a common route — it replaces a multi-year holdback with a one-off premium.

Negotiable in every case: the amount, the duration, the liability cap, de minimis thresholds for individual claims, and a basket threshold below which no liability arises at all. Longer periods regularly apply to tax than to other warranties.

What belongs in the sale agreement and how these points interact is set out under the company sale and purchase agreement.

Earn-out: the part that comes later — or does not

Under an earn-out, part of the price depends on future performance. It bridges differing expectations: the buyer does not fully believe the business plan, the seller stands behind it.

The instrument makes sense. The drafting decides whether it is fair.

Three points determine the outcome. First, the reference measure: revenue is less open to manipulation than profit, because group charges, transfer pricing and the buyer's investment decisions all feed through to profit after the takeover. Second, the period: the longer it runs, the less your own work has to do with it. Third, your influence: without participation rights and protective covenants against adverse interference, your money depends on decisions somebody else takes.

An earn-out without protective covenants is not a component of the price but a hope. In detail: earn-out.

Vendor loans as a component of the price

Under a vendor loan you defer part of the purchase price. The buyer repays it over an agreed period, with interest.

That widens the field of possible buyers considerably — particularly in management buy-outs, where financing otherwise often fails.

The price you pay is risk: you are a creditor of the company you have just handed over, and you regularly rank behind the financing bank. Security, ranking, interest and termination rights on default therefore deserve to be negotiated as carefully as the price itself. More on this under vendor loan.

How the building blocks add up to actual proceeds

An offer at an enterprise value of EUR 10 million can mean: EUR 8 million at completion, EUR 1 million in escrow for eighteen months, EUR 1 million of earn-out over three years.

A second offer at EUR 9.5 million can mean: EUR 9.5 million at completion, liability covered by W&I insurance, no holdback, no earn-out.

The second offer is lower and, for most sellers, the better one.

Never compare offers on the headline figure. Compare them on four measures: the amount at completion, the amount that is conditional, the period until payment is complete, and the risk that part of it never arrives.

This arithmetic is why a structured process with several interested parties achieves more than a good negotiation with a single one. Not because the nominal price rises — but because the terms soften as soon as a buyer knows he is not the only one.

What you should settle before negotiating

Three things should be clear before the first indicative offer.

Your own net debt definition: which items you accept as debt-like, which you do not — and on what reasoning.

Your working capital curve over at least 24 months, evidenced from your own systems.

Your floor on the cash component: what amount has to flow at completion for the transaction to work for you.

Anyone who has prepared those three points negotiates the mechanics. Anyone who has not accepts the buyer's mechanics and is left negotiating only the multiple — the smaller lever.

The full course of a sale process is described under selling your company; the particular features of a share sale in a GmbH under selling a GmbH.

FAQ

What is the difference between Locked Box and Closing Accounts?

Under a Locked Box the price is fixed on the basis of a past effective date and is not adjusted after completion. Under Closing Accounts, interim accounts are drawn up after completion and the provisional price is corrected against the actual figures. Locked Box gives certainty, Closing Accounts gives accuracy.

Which mechanism is better for the seller?

As a rule the Locked Box — provided robust, current accounts exist. The price is fixed, the post-completion dispute falls away, and accounting judgement does not sit with the other side. Where figures swing sharply or the last accounts are well out of date, buyers rarely agree to it.

What does cash and debt free mean?

The buyer takes over the company without cash and without financial debt. Cash on hand increases the amount paid out to you, existing financial liabilities reduce it. Which items count as debt has to be defined in the agreement — and that is exactly where the room for negotiation arises.

How large are holdbacks usually?

That depends on deal size, risk profile and the outcome of due diligence; there is no universally applicable figure. Alongside the amount, what is negotiable is above all the duration, the liability cap, and whether an escrow account is set up instead of a simple holdback. W&I insurance can replace the holdback entirely.

When is the purchase price paid out?

The cash component falls due at closing, that is at completion — which, depending on the conditions, can be weeks or months after signing. Holdbacks are released once the warranty periods expire, earn-out payments once the relevant period has been determined. Several years can pass between signing and payment in full.

Do I have to negotiate the purchase price mechanics myself?

Negotiate them you must, in any event — the question is whether you do so prepared. The definitions of net debt and working capital are usually tabled by the buyer. Anyone with no proposal of their own is negotiating on the other side's wording. Tax and legal assessment in the individual case belongs with your tax adviser and your lawyer.

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Selling a company is the most important transaction of an entrepreneurial life. Take independent, discreet advice — IGCP Capital Partners. → igcp.at