Every deal has a gap between agreeing the price and handing over ownership. The business keeps earning, cash keeps moving and the owner keeps getting paid. The price mechanism decides who owns that period and how the final number is set. - Completion accounts: The headline price assumes the business is delivered with no cash, no debt and a normal level of working capital. The buyer pays an estimate at closing. Within 60 to 90 days, a balance sheet is drawn up at the closing date and the price moves dollar for dollar against what was assumed. The seller keeps profits up to closing. - Locked box: The price is fixed using a balance sheet at a past date, the locked box date, so the equity price is final at signing. Profits and risk pass to the buyer from that date. In return, the seller promises no value leaves the business before closing (leakage). Pre-agreed payments, such as normal salaries, are listed as permitted leakage. Anything else is repaid dollar for dollar. Sellers often ask for a “ticker”, a daily amount added to the price, to cover profits earned after the locked box date. PPA mechanisms continue to be more popular in the US than in European deals, with 92% of this year’s US transactions using a PPA versus 48% in Europe. Who Carries The Gap - Profits after the balance sheet date: Under completion accounts, profits earned before closing usually show up as extra cash or lower debt at closing, and the price adjustment pays the seller for them. Under a locked box, the price stops moving at the locked box date, so those profits stay with the buyer. Sellers often ask for a “ticker”, a daily amount added to the price until closing, to recover them. - Bad news already in the numbers: Completion accounts catch it, because the closing balance sheet is prepared fresh and the price adjusts. A locked box does not, because the price was fixed on the old balance sheet. The buyer’s only route is a warranty claim, subject to caps and minimum thresholds. - Certainty of the final price: A locked box price is known at signing. A completion accounts price is known three to four months after closing, with part of it held in escrow until then. One Business, Two Mechanisms A commercial cleaning business sells for a $6M equity price under a locked box dated March 31, with closing on July 31. Diligence finds two problems. First, the seller paid itself a $90K dividend in May that was not permitted leakage. The seller repays it dollar for dollar if the buyer claims in time. Under completion accounts, lower closing cash would have cut the price automatically. Second, receivables at March 31 included $120K from a customer that stopped paying in February. This is not leakage, because nothing left the business after the locked box date. Under completion accounts, the closing balance sheet would have written it off and the price would have dropped. Under the locked box, the buyer has to bring a warranty claim. With a $150K minimum claim threshold, the buyer recovers nothing. Drafting Points That Decide The Outcome - Leakage definition: Name the payments that matter in owner-run businesses. These include rent above market paid to the owner’s property company, personal expenses, management fees paid to the seller’s holding company, and write-offs of amounts the seller owes. - Permitted leakage: List every pre-agreed payment with a dollar amount, so nothing is argued after closing. - Security for claims: Sellers distribute proceeds quickly, so a holdback protects the buyer’s leakage claim. - Closing statement rules: Under completion accounts, attach an illustrative closing statement and the accounting policies to the purchase agreement, so both sides calculate the price the same way. Share Your Perspective: Has a leakage claim or a closing statement dispute changed the final price on a recent deal? Share how was that resolved.