Locked Box or Completion Accounts?
BP Corporate recently completed the sale of National Autorax to Inneva Ltd. National Autorax, established some 30 years ago and acquired by our Client just after the turn of the millennium offers a full design, manufacture and installation service, as well as online retail and distribution, of its own product range of specialised light vehicle internal racking and roof racks. The acquiring Company identified value in the significant Intellectual Property on offer and were in a strong position to develop the Company alongside their growing operation.
Of course, agreeing on a base price is only the first step in the sale process. A Share Purchase Agreement drawn up by the buyers called for the actual price to be paid to be established through Completion Accounts. While the preparation of Completion Accounts has traditionally been the “go to” mechanism of establishing the actual balance sheet value at completion of a sale, we are seeing a trend towards a “Locked Box” approach.
Both mechanisms are based on a similar principle, i.e determining the balance of assets and liabilities at a fixed point in time. With the Completion Accounts method, a set of accounts are drawn up, usually by the Vendors accountants following completion of the transfer. These accounts are then checked and verified by the Buyers accountants. The buyer then pays for the actual value of the balance sheet as an adjustment to the agreed price sometime after Completion. With Completion Accounts, the economic risk of the Company transfers to the Buyer at the same time as the operational risk.
With the “Locked Box” approach, an appropriate point in time is chosen and accounts are prepared at that point in time. This can be a few weeks prior to Completion. On this date the financial position of the Company is “locked down” and the economic risk/reward transfers to the Buyer at this point in time. One of the main benefits of this methods is that the final price to be paid is known at Completion of the transfer.
Each method has pros and cons, for both the Buyer and the Seller. With Completion Accounts, the final price to be paid is not finalised until some time after completion of sale. However, it can be significantly more costly with both sides bearing the cost of preparation, investigation and potential disputes arising from the accounts. The Seller retains the profits right up to the date of hand-over whether this is positive or negative!
Locked Box allows both sides to know prior to completion, the position of the Company at hand-over and the final price to be paid/received. The process is simpler and therefore less costly. The economic risk is transferred prior to the operational risk.
With the sale of National Autorax, the Seller had excellent management accounts prepared monthly by their accountant, and it was agreed that the financial position of the Company could be readily assessed and agreed from these accounts. The decision was therefore taken to adopt the Locked Box method of assessing the asset/liability position prior to Completion. At the appropriate month end the Company was “locked down” and the economic risk/reward transferred to the Buyer. This allowed both sides to then progress the final legal due diligence over a two week period to a satisfactory completion.
The Locked Box method certainly worked in this transaction. The finances of the Company were under close control so it did lend itself to this option. Locked box will not suit all scenarios and both Buyers and Sellers should take independent legal advice before agreeing which route to take.