In mergers and acquisitions, agreeing on valuation, completing due diligence, and aligning on strategy are often seen as the hardest parts of the deal. Yet, even after these hurdles are cleared, many transactions face unexpected friction—sometimes lasting months—over one critical detail: the final purchase price. This challenge rarely stems from disagreement on value itself, but rather from the mechanics of how that price is determined at closing.
Two widely accepted approaches dominate this space: the locked box and completion accounts mechanisms. While both aim to provide clarity and fairness, the choice between them can significantly influence how smoothly a deal closes, the level of post-completion disputes, and whether the transaction truly feels “finished.”
The key distinction between the two mechanisms lies in timing. Under a locked box structure, the purchase price is fixed at signing based on a historical balance sheet and remains unchanged thereafter. In contrast, under a completion accounts structure, the parties agree on a provisional price at signing, which is subsequently adjusted after closing to reflect the business’s financial position at the completion date.
Locked Box
Under a locked box structure, the purchase price is fixed by reference to a balance sheet prepared as of a specific historical date (the “locked box date”). From the locked box date onward till closing, the seller is restricted from extracting value from the business. This restriction, known as leakage, covers dividends, management fees, related party transactions on non-arm’s length basis, asset transfers, and any other payments that would reduce the business value before closing. If leakage occurs in breach of these restrictions, the buyer is entitled to recover it on a dollar-for-dollar basis.
However, certain payments are expressly allowed between the locked box date and completion (“permitted leakage”) such as payments made in the ordinary course of business, transaction related costs, etc. Since the seller continues to operate the business between the locked box date and closing, sellers often negotiate an interest or value accrual to compensate for the time value of money during that period.
The primary advantage of locked box is certainty. Both parties know the price at signing, and there is no post-closing adjustment process. This makes execution faster and cleaner, and it eliminates the risk of disputes over completion accounts. For sellers, it also means proceeds can be distributed immediately without holdbacks or reserves.
The trade-off is that the buyer assumes risk, which often requires supplementary risk advisory support to assess leakage controls and validate the underlying financials prior to signing. If the business underperforms between the locked box date and closing, or if the locked box accounts contain errors, there is no mechanism to adjust the price. Buyers must therefore be confident in the accuracy of the locked box accounts before signing.
Locked box is well suited to stable businesses with predictable cash flows and reliable audited financials. For private equity sellers, locked box allows a clean exit with immediate distribution to limited partners. In the Saudi market, government and quasi-government transactions tend to favor locked box structures due to faster and cleaner execution.
Completion Accounts
Under a completion accounts structure, the parties agree on a preliminary purchase price at signing based on estimated levels of cash, debt, and net working capital. After closing, completion accounts are prepared to determine the actual figures of cash, debt and net working capital as of the completion date.
If the company’s net debt at closing is positive, the price will be increased by that amount. Conversely, if the net debt is negative, the price will be reduced by that amount. Additionally, if the company’s working capital at closing is below the agreed working capital levels, the price will be decreased by the difference. If the working capital exceeds the normal level, the price will be increased by the difference.
This process typically takes 60 to 90 days after closing, during which one party prepares the accounts and the other reviews and challenges them. For this mechanism to work effectively, the definitions of cash, debt, and net working capital must be clearly agreed in the SPA before signing. Ambiguity in these definitions is one of the most common sources of post-closing disputes.
The primary advantage of completion accounts is precision. The buyer pays for what the business is actually worth on the day of closing. This protects against deterioration in the business between signing and closing, and it allows the price to reflect reality rather than estimates.
The trade-off is complexity and the potential for disputes. Disagreements frequently arise over accounting policies, cutoff issues, and the definition of normalized working capital. If the parties cannot resolve these issues, they are often referred to expert determination, which adds cost, time, and friction.
Completion accounts are more appropriate when the business shows genuine volatility in inventory, receivables, or working capital. They are also suitable for carve-out transactions, where standalone financials rely on estimates for shared services, intercompany balances, and allocated overhead. A long gap between signing and closing is another factor that supports completion accounts, as regulatory approvals, competition clearance, and financing conditions can significantly extend timelines. Completion accounts may also be appropriate when the buyer does not fully trust the historical financial information. In Saudi Arabia, private sector transactions involving international buyers lean toward completion accounts for this reason, particularly when foreign acquirers seek additional protection when acquiring a business, they know less well.
Figure 1 Summary of purchase price mechanisms
Why the Mechanism Changes Diligence
The choice of closing mechanism affects how risk is allocated and what diligence must accomplish. In a locked box transaction, diligence focuses on price certainty at the locked box date and leakage protection. The objective is to confirm that the locked box accounts are correct and reliable. There is no post-closing adjustment to correct errors or omissions. Diligence must verify the accuracy of net debt, cash, and working capital as of the locked box date and identify any potential sources of leakage between the locked box date and closing. If the numbers are incorrect or if leakage is not adequately controlled, the buyer has limited recourse after signing.
In a completion accounts transaction, diligence focuses on price accuracy and the mechanics of post-closing adjustments. The objective is not to lock in a final number before signing, but to establish the framework for calculating that number after closing, often supported by financial due diligence and business valuation services that inform normalized working capital and net debt definitions. Diligence must help define what constitutes normal net working capital and net debt, because these definitions will determine how adjustments are calculated. The goal is to ensure that both parties have a shared understanding of what the completion accounts will measure and how disputes will be resolved.
Common Mistakes
Several common mistakes occur across transactions. One is relying on a locked box date that is too far removed from signing, which increases both business risk and exposure to leakage. Another is failing to define leakage clearly, which almost guarantees disagreement later. A third is adopting completion accounts without agreeing on a transparent methodology for calculating working capital and other adjustments, thereby undermining the mechanism's effectiveness.
The Bottom Line
Neither a locked box nor a completion account is appropriate for every transaction. Locked box prioritizes certainty, while completion accounts prioritize precision. The right choice depends on the nature of the business, the counterparties involved, and the level of post-signing risk each party is willing to accept.
What matters most is addressing the issue early. The closing mechanism should be discussed before the diligence scope is finalized, before the financial model is locked, and before purchase agreement drafting begins. When treated as a detail, it becomes a source of friction. When treated as a decision owned by deal leadership from the outset, the transaction closes more smoothly.
For organisations evaluating M&A or divestment strategies in Saudi Arabia, support from experienced M&A advisory, valuation, and transaction services specialists can materially de-risk the process.
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Authors:
Head of Deal Advisory Services
Sawsan Alnemer
M&A Practice Leader
Zain Jawed
Transaction Services Practice Leader