Transaction completion mechanisms - what's in your Locked Box?

November 14, 2016

A feature of almost every single M&A transaction is that the final price for the business will differ to the earlier price agreed between the seller and purchaser at heads of terms stage.

There’s always a lot of negotiation that goes on and both parties are looking to get the best deal which results in the headline price moving up and down.

But, if you are a seller, there really are some traps down in the detail of the deal that you need to navigate successfully otherwise that headline price is either going to be a lot lower than expected at the outset or, even worse, you will either leave value that is yours on the table for the purchaser to enjoy or the deal collapses altogether.

These traps include:

Defining debt – any debt will be deducted from the business price - we all immediately think of bank borrowings as debt but this can be a grey area requiring careful negotiation – savvy purchasers will attempt to include taxes, deferred income, dilapidations, employee bonuses and the list goes on – all these add up and can be a material downward revision to price;

 

Normal working capital – the heads of terms will include a phrase that the business is bought with “normal working capital”, but what’s “normal” and what’s “working capital”? Sounds simple? But this is a paradise for blinkered accountants to spend weeks arguing over! There are numerous methods for calculating and defining working capital – if you get this wrong, the price is only going south;

 

What’s cash? Again sounds simple – the phrase debt free/cash free is synonymous with transactions but even cash is a point for negotiation – cash physically in your bank on completion or in the accounting records? Cash in tills? Deposits? What about tax losses brought forward that will be offset against future trading profits? The message to all sellers is don’t lose out on the cash definition as remember this is a positive upward movement to price; and

 

Locked Box or Completion accounts? The Locked Box was invented to make the completion of transactions simpler – without going into the detail here; don’t underestimate the complexity, it’s a can of worms and whilst both the seller and buyer will get certainty at completion; it doesn’t do away with all the negotiation of weird terms like “leakage” (permitted or otherwise), daily cash profits and normalisation adjustments etc. The Locked Box is full of elephant traps and a seller must be properly prepared for the negotiation.

 

The good news is that the seller can successfully navigate their way through all the above but don’t go banking what’s in your box too early if you’ve just focussed on the headline price and ignored the preparation required to avoid all these traps.‍

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