Two companies agree on an enterprise value of €50 million. The deal is supposed to close in sixty days. But between signing and closing, the seller pays out a dividend to its shareholders, the working capital drops below the agreed target, and net debt increases by €2 million. Who bears those consequences, and how exactly does the final price get calculated? The answer is not in the headline number. It is in the price mechanism written into the Sale and Purchase Agreement.
This is the choice that determines how a deal actually settles financially: locked box or completion accounts. Most acquirers and founders only encounter it once or twice in their careers. Getting it wrong can mean months of post-closing disputes over sums that seem modest relative to the deal size but are expensive and distracting to resolve.
This article explains how each mechanism works, what each one protects, and how to decide between them in a transaction involving a Serbian company or target.
Contents
- Why the Price Mechanism Matters in M&A
- From EBITDA to Final Price: Bridging the Gap
- How Completion Accounts Work
- How the Locked Box Mechanism Works
- Leakage and Permitted Leakage: The Locked Box's Protective Mechanism
- Locked Box vs. Completion Accounts: A Practical Comparison
- The Role of Due Diligence in Choosing the Right Mechanism
- M&A Price Mechanisms in Serbian Practice
- Which Mechanism Should You Choose?
- Frequently Asked Questions
Why the Price Mechanism Matters in M&A
Buying a company is not like buying a car. You agree a price today, but legal ownership transfers weeks or months later. In the interim, the business keeps operating: cash flows in and out, debts fluctuate, working capital moves with the business cycle. A deal with no price mechanism would mean the buyer pays the agreed headline price regardless of what the business looks like on closing day. That benefits one party at the expense of the other.
The Sale and Purchase Agreement (SPA) addresses this through a defined price mechanism. Two frameworks dominate international and Serbian M&A practice: completion accounts and the locked box. Each answers the same fundamental question differently: at what point in time is the business financially frozen for pricing purposes, and who bears the financial risk between signing and closing?
The stakes are not abstract. A buyer who pays on a locked box but fails to properly review the reference balance sheet may inherit hidden liabilities. A seller who accepts completion accounts without careful definition of accounting policies may face a downward adjustment based on the buyer's interpretation of "correct" accounting months after the deal has closed.
From EBITDA to Final Price: Bridging the Gap
When a buyer and seller negotiate an acquisition, they typically start from an agreed enterprise value derived from a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortisation). A buyer might agree to pay "8x EBITDA" based on the target's trailing twelve-month results. For a company with €6 million in EBITDA, that means an enterprise value of €48 million.
That enterprise value, however, is an equity-free number. It represents the value of the entire business, including its debt. The buyer does not want to pay €48 million and then discover that the company owes €5 million to a bank. Equity value is what the buyer actually pays to the seller for their shares, and it is derived from enterprise value by deducting net debt and adjusting for normalised working capital.
This is precisely the gap that locked box and completion accounts are designed to fill. Both mechanisms answer the question: what is the equity value of this specific business, at this specific point in time, under these specific circumstances? EBITDA valuation sets the reference point. The price mechanism settles the final bill.
How Completion Accounts Work
The completion accounts mechanism is the more traditional of the two approaches, and it follows a clear logic: agree a provisional price now, verify the actual financial position later, and adjust accordingly.
In practice, the process unfolds as follows. At signing, the parties agree on a provisional purchase price. They also agree on target figures for three key financial metrics:
- Net debt – the company's total financial indebtedness minus cash and cash equivalents
- Working capital – current assets minus current liabilities, measured against an agreed normalised target
- Net assets – the overall equity value of the business
After closing, the seller prepares a draft set of completion accounts, typically within 30 to 60 days. These accounts are drawn up as at the closing date and capture the business's actual financial position on that day. The buyer then reviews the draft and has a defined period to raise objections. If the parties cannot agree, an independent accountant is appointed to determine the final figures.
Once the completion accounts are finalised, the provisional price is adjusted. If net debt was higher than expected, the buyer's payment is reduced. If working capital exceeded the target, the buyer pays more. The net effect of all adjustments produces the final consideration.
The clear strength of completion accounts is accuracy. Consider a seasonal retail business that signs in May but closes in December: the December balance sheet will look materially different from any historical reference point, and completion accounts will capture that difference precisely. The buyer pays for what they actually received.
The trade-off is real. The mechanism introduces post-closing uncertainty that can run for months. Disputes about accounting policies, the classification of specific items, or the basis on which completion accounts are prepared are routine in complex transactions. Those disputes cost time and money, and they are corrosive to the post-closing relationship between buyer and seller.
How the Locked Box Mechanism Works
The locked box takes the opposite approach to completion accounts. Rather than adjusting the price after closing, the parties agree a fixed purchase price at the moment of signing, based on a historical balance sheet prepared as at the "locked box date." That date is typically the last audited or reviewed accounts of the target company.
The name captures the concept well. Think of it as the financial position of the company being sealed inside a box at a fixed point in time. The buyer inspects what is in the box before signing, agrees a price for its contents, and the box does not change. From the locked box date onward, the economic risk and reward of the business pass to the buyer, even though legal ownership does not transfer until closing.
An equity ticker is often used to compensate the buyer for the time value of money over the locked box period. If the locked box date is three months before closing, the buyer is effectively funding the business for those three months without yet owning it. The equity ticker is a daily interest accrual, calculated on the locked box price at an agreed rate, which reduces the purchase price paid at closing.
The defining advantage is certainty. The seller knows exactly how much it will receive. The buyer knows exactly what it will pay. There is no post-closing adjustment process, no dispute about accounting policies, and no residual financial exposure for the seller after the deal closes. For a private equity fund completing a portfolio exit, a locked box is often a non-negotiable commercial requirement.
Leakage and Permitted Leakage: The Locked Box's Protective Mechanism
Since the financial risk shifts to the buyer at the locked box date, the buyer needs protection against the seller using the company's resources for its own benefit in the interim. This is where leakage provisions come in.
Leakage covers any extraction of value from the company by or for the benefit of the seller or its connected persons between the locked box date and closing. The most common categories include:
- Dividends or other distributions to shareholders
- Management fees or advisory fees paid to seller-affiliated entities
- Payments under related-party contracts at above-market rates
- Asset transfers at below-market value to seller-connected parties
- Waivers of amounts owed to the company by seller-affiliated persons
- Transaction bonuses or deal-related payments to seller management
Leakage triggers a euro-for-euro reduction in the purchase price. The SPA typically includes a seller warranty that no non-permitted leakage has occurred, and a corresponding indemnity if a breach is discovered.
Permitted leakage is carved out of this prohibition. It covers pre-agreed ordinary-course payments that the parties acknowledge will occur between the locked box date and closing, most commonly salaries and bonuses to seller-affiliated management at rates consistent with historical practice. All permitted leakage is identified and quantified in a schedule annexed to the SPA.
The drafting of the leakage definition is one of the most commercially significant tasks in a locked box transaction. An overly narrow leakage definition may leave the buyer exposed to value transfers that are technically outside the agreed categories. An overly broad definition may unreasonably constrain the seller's ability to operate the business normally before closing.
Locked Box vs. Completion Accounts: A Practical Comparison
| Factor | Locked Box | Completion Accounts |
|---|---|---|
| Price certainty | Fixed at signing | Determined after closing |
| Post-closing disputes | Limited to leakage claims | Full adjustment process; frequent disputes |
| Financial risk allocation | Buyer bears risk from locked box date | Seller bears risk until closing day |
| Preferred by | Sellers; private equity exits | Buyers; strategic acquirers |
| Requires | Reliable recent historical accounts | Agreed accounting policies and targets |
| Best suited to | Stable businesses; competitive auctions | Volatile or seasonal businesses |
| Administrative complexity | Lower post-closing | Higher; 30–90 day adjustment process |
| Time value compensation | Equity ticker | Reflected in closing-day accounts |
The choice also reflects the deal structure. In a competitive auction process, where a seller has multiple bidders and wants a clean, predictable outcome, the locked box is almost always the default. Bidders who insist on completion accounts in a competitive process may find themselves at a commercial disadvantage. In bilateral deals with fewer time pressures and where the buyer has more negotiating leverage, completion accounts remain common.
The Role of Due Diligence in Choosing the Right Mechanism
Before any meaningful choice between locked box and completion accounts can be made, the buyer needs to understand what the target's financial position actually looks like. That is the purpose of financial due diligence, conducted in the weeks between signing the non-disclosure agreement and finalising the SPA.
Due diligence findings shape the mechanism choice in concrete ways. If the target's accounts are well-maintained, subject to regular audit, and consistently prepared, a locked box becomes viable. The buyer can have reasonable confidence in the reference balance sheet. If the accounts show aggressive revenue recognition policies, significant related-party transactions that are difficult to disentangle, or gaps in financial controls, the buyer will typically insist on completion accounts. The ability to reprice on closing-day verified figures is too valuable to give up.
Working capital analysis matters for both mechanisms. For completion accounts, the buyer needs to understand the target's normalised working capital position in order to set a sensible target. Setting the target too low benefits the seller; too high benefits the buyer. For a locked box, working capital analysis tells the buyer whether the period between the locked box date and closing carries significant financial risk, particularly in seasonal businesses where working capital can swing sharply.
Legal due diligence also feeds into the decision. Undisclosed liabilities, pending litigation, or regulatory exposures identified during the process may lead parties to build additional protections into the SPA price mechanism, or to shift toward completion accounts to preserve flexibility to address last-minute developments.
For M&A transactions in Serbia, Zunic Law advises on the full mergers and acquisitions process, from early structuring through due diligence coordination and SPA negotiation.
M&A Price Mechanisms in Serbian Practice
Serbia's position as a regional technology hub has brought a wave of M&A transactions involving software companies, product-focused startups, and established IT service providers. These transactions often involve founders or early-stage investors on the sell side, acquiring companies from Western Europe or North America on the buy side, and Serbian legal and financial advisers coordinating both.
The locked box is the preferred mechanism for most Serbian tech exits. Founders want a clean outcome: a fixed price, no post-closing exposure, and no drawn-out adjustment process that keeps them financially tied to a business they have just sold. Private equity funds that have invested in Serbian tech companies share that preference.
The practical obstacle is the quality of the reference balance sheet. Many Serbian technology companies, particularly those that have grown rapidly from a founder-led model, maintain financial records that satisfy tax compliance requirements but are not structured in a way that supports a robust locked box. Revenue recognition policies, treatment of deferred income, intercompany arrangements between founder-related entities, and the distinction between employees and independent contractors can all create ambiguity when constructing the locked box accounts.
In practice, this has led to hybrid approaches. Parties agree on a locked box structure but invest significant effort in the pre-signing due diligence phase to normalise the reference balance sheet and agree on specific adjustments. The permitted leakage schedule in Serbian tech deals tends to be more detailed than in comparable Western European transactions, reflecting the need to address founder-related payments and compensation structures that are specific to earlier-stage companies.
A notable transaction that illustrates how innovative Serbian technology companies can attract global acquirers is the acquisition of Wonder Dynamics by Autodesk, in which Zunic Law represented Wonder Dynamics.
Which Mechanism Should You Choose?
The locked box tends to be the right choice when the seller is prioritising a clean exit, the transaction is running as a structured auction, the business has stable financials and recently audited accounts, and the locked box period is short or adequately compensated by an equity ticker.
Completion accounts tend to be the right choice when the buyer does not have full visibility into the target's financial position, the business is financially volatile or has complex seasonal working capital movements, the historical accounts are not sufficiently reliable to serve as a reference balance sheet, or material changes to the business are expected between signing and closing.
In either case, the drafting of the relevant SPA provisions deserves careful attention. Completion accounts mechanisms require precise definition of accounting policies, a clear and workable dispute resolution procedure, and unambiguous financial targets. Locked box mechanisms require airtight leakage definitions, a well-constructed reference balance sheet, and, where relevant, a properly calibrated equity ticker.
Both mechanisms are legitimate, well-tested tools. The one that fits your transaction will depend on the characteristics of the business, the quality of its financial information, the nature of the deal process, and the relative bargaining positions of buyer and seller. Getting that choice right, and drafting the resulting provisions with precision, is where legal advice adds the most value in an M&A transaction.
Zunic Law advises buyers, sellers, and investors on the full M&A lifecycle, including price mechanism selection, SPA negotiation, and post-closing disputes. For advice on structuring your transaction, visit our practice areas page.
Frequently Asked Questions
What is the main difference between a locked box and completion accounts?
The locked box fixes the purchase price at signing based on a historical balance sheet, with no post-closing adjustments. Completion accounts determine the final price after closing, based on financial statements prepared as at the actual closing date. The locked box offers certainty; completion accounts offer accuracy. Sellers typically prefer the locked box; buyers often prefer completion accounts.
What is leakage in a locked box transaction?
Leakage is any value extracted from the company by or for the seller's benefit between the locked box date and closing, such as dividends, management fees, related-party payments at above-market rates, or asset transfers at below-market value. Leakage is prohibited and triggers a euro-for-euro reduction in the purchase price. Pre-agreed ordinary-course payments, such as normal management salaries, are carved out as "permitted leakage" in a schedule to the SPA.
Which mechanism is more common in Serbian M&A transactions?
The locked box has become the preferred mechanism in most Serbian tech and private equity-driven transactions. Sellers want price certainty and a clean exit. Completion accounts remain common in transactions where the buyer has limited financial visibility, the business is volatile, or the historical accounts are insufficiently reliable to support a locked box. Both mechanisms are used, and the choice depends on the specific transaction dynamics.
What is an equity ticker in a locked box deal?
An equity ticker is a daily interest accrual that compensates the buyer for the time value of money during the period between the locked box date and closing. Since the buyer bears the financial risk of the business from the locked box date but does not pay the purchase price until closing, the equity ticker effectively reduces the purchase price by a daily amount calculated on the locked box price at an agreed interest rate.
Can completion accounts disputes be avoided?
They can be significantly reduced through precise drafting. The most effective prevention measures are agreeing detailed accounting policies in the SPA that are specifically tailored to the target company, defining the financial metrics (net debt, working capital, net assets) with sufficient specificity to leave limited room for interpretation, and including a robust expert determination procedure as a fallback mechanism. Even well-drafted agreements carry some residual dispute risk; completion accounts simply require more careful drafting than a locked box to deliver a clean outcome. For M&A legal advice in Serbia, see our M&A practice.
About the authors
