Corporate Law
Locked Box vs Completion Accounts
You shake hands on R40 million and close five months later. Is it still R40 million on the day the money moves — and who decides?
Written by
Martin Kotze
Attorney, Conveyancer & Notary Public
Contents
1. Where the Number Actually Comes From
You shake hands on R40 million. Then the lawyers start, the buyer’s bank wants three months, competition approval takes another two, and closing lands five months later. On the day the money actually moves, is it still R40 million?
That question exists because a price agreed today rests on assumptions about a business that keeps trading, and reality on closing day never matches the assumptions. When a buyer says your business is worth R40 million, they are valuing the business itself — its ability to generate profit — not what happens to be in the bank account. That figure assumes three things.
No cash in it
Cash in the company is yours, so it is added to the price.
No debt in it
Loans and overdraft are yours to settle, so they come off.
A normal level of working capital
The money permanently tied up in running the place: your stock on the shelves, plus what customers still owe you, less what you owe suppliers. If your business normally needs R12 million tied up like that, the buyer is pricing on the assumption that R12 million is there on the day they take over. If only R9 million is there, they must put R3 million in on Monday morning, and they will want it off the price.
The R40 million becomes a real number
| Headline price for the business | R40 million |
| Plus cash in the company | + R5 million |
| Less debt in the company | − R7 million |
| Equals — for your shares | R38 million |
— assuming working capital lands where you both said it would.
Every one of those numbers came off a balance sheet with a date on it. By closing day, stock has been sold, debtors have paid, a big supplier invoice has gone out and a bonus run has cleared. So you have to choose: read the meter on the day, or trust last month’s statement and promise not to run the taps.
2. The Meter Reading
Think about selling a house with a prepaid electricity meter. There are two ways to settle what is left on the meter.
Read the meter on the day
Meet on transfer day, read the meter together and settle the difference in cash.
Accurate, but you do not know the number until you are standing there, and you rely on whoever writes the reading down.
Trust last month’s statement
Take last month’s statement, agree the number now, and have the seller promise not to run the pool pump and the geyser flat out for the last month.
Certain and simple, but it depends entirely on that promise being kept and the statement being honest.
The first is completion accounts. The second is a locked box.
3. Completion Accounts
Also called closing accounts. You close the deal on an estimate, and the buyer pays you that estimated price on the day. Then, usually within sixty to ninety days, accounts are drawn up as at closing day, measuring the three things that matter: how much cash, how much debt, and how much working capital against the agreed target. The difference is settled in cash, either direction. If you and the buyer cannot agree, an independent accountant decides, and that decision binds you both.
The true-up cuts both ways — the R38 million example
The accounts come back weaker
Working capital of R10 million against a target of R12 million, and debt of R8 million rather than R7 million. You repay R3 million.
A strong final quarter
Working capital of R13.5 million and debt down to R6 million — the buyer owes you R2.5 million more.
The advantages are real
- The price reflects what the buyer actually received, so nobody is arguing from a stale picture
- You keep the value you generate right up to the moment you hand over the keys
- Have a record June while the lawyers are still drafting, and that value is yours
The disadvantages land on you
- You do not know your final number on closing day, and you will not know it for months
- The buyer almost always prepares the accounts — by then they own the business, the books and the finance team
- You get to review and object, on a clock, using information they give you
- You may be writing a cheque four months after you thought you were finished, when the money has been distributed or spent
This is the single most common source of post-deal fights, and the fights are never about arithmetic. They are about judgment: how much of the debtor book is doubtful, how much slow-moving stock to write down, whether the leave accrual is enough, whether a customer deposit counts as debt. Each of those is worth money. That is why part of your price usually sits in escrow — held by an attorney or a bank — until the adjustment is settled.
Watch out
On completion accounts, the buyer holds the pen. Your protection is not trust; it is writing the rules down before you sign — the accounting policies, how doubtful debts and old stock are provided for, what counts as debt, and a worked example attached to the agreement.
4. Locked Box
The other route is to fix the price now and control the risk differently. You pick a date where you already have proper accounts — usually a year-end or a solid month-end. Say 28 February. The price is calculated off that balance sheet: that cash, that debt, that working capital. It is then fixed. It does not get adjusted afterwards. Ever.
The trade is this. From that date onwards the business runs for the buyer’s economic account, even though you still own it and still run it until closing. The profits you make from March through August are, in economic terms, theirs. So are the losses.
Leakage — value taken out of the box
Because the buyer is paying for the box as it stood in February, you must not take anything out of it. Value taken out is called leakage, and it covers more than people expect:
- →Dividends
- →A bonus to yourself
- →Repaying your shareholder loan account
- →The company settling a personal expense
- →Selling a company bakkie to your son’s business at a friendly price
- →The company paying your legal fees for the sale
If you take it out, you pay it back rand for rand — not net of tax, not reduced by a threshold. Declare a R1.5 million dividend in June and R1.5 million comes off at closing.
Permitted leakage — the list of what you may take out
The other half of the bargain is the list of things you are allowed to take out: permitted leakage. Your salary of R150,000 a month. An agreed management fee to your holding company. A dividend you told the buyer about and which was priced in. Anything on the list comes out legitimately; anything not on it is leakage. So the work all happens before signature: write out every regular payment that flows from the company to you, your family or anything you own, and get it onto the list. Sellers get caught by the ordinary and the forgotten — the annual bonus you have paid yourself every August for eleven years. Getting that list complete is part of preparing your business for sale.
Interest on the price
One more moving part. Because the buyer gets the profits from the locked box date but only pays on closing, they sometimes pay you interest on the price for that gap. On R40 million at around 8% that is roughly R8,800 a day, so a five-month gap is about R1.3 million. Sometimes there is no interest, because the price is strong or the gap is short. That is a straight price negotiation and you should treat it as one, not wave it through as a technical term.
The advantages: certainty and speed
- You know your number when you sign
- A clean exit with no process running afterwards, no escrow held back for an adjustment, and no argument in December about a stock provision
- Faster and cheaper, because there is one accounting exercise instead of two
The disadvantages are three
- It only works if the reference accounts are recent and reliable — no buyer will fix a price off fourteen-month-old management accounts, and if yours are unaudited expect to pay for that in price or in tighter promises
- You carry the leakage risk: if the buyer says the R400,000 that went to your daughter’s marketing company was leakage and you say it was ordinary trading, that is your fight, after closing, with your money at stake
- If closing is delayed — approval takes five months instead of two — you have been running the business for the buyer’s benefit for longer, and unless interest covers it, you gave those months away for free
Watch out
Under a locked box, delay costs you. Before you agree to no interest, ask honestly how long the conditions will really take and what the business earns in a month.
5. Side-by-Side Comparison
The two mechanisms answer the same question — what was actually in the company when it changed hands — at different times, with different people holding the pen.
Locked Box vs Completion Accounts — At a Glance
| Factor | Locked Box | Completion Accounts |
|---|---|---|
| When you know your final price | On signature | Two to three months after closing |
| Who prepares the numbers | Agreed before signature, off your accounts | Usually the buyer, after closing |
| Money held back in escrow | Usually none for price | Common |
| Who gets the profit between the reference date and closing | The buyer, unless you are paid interest | You |
| Main risk you carry | A leakage dispute; delay to closing | A downward adjustment you cannot control |
| Cost and speed | Cheaper, faster, one process | More expensive, slower, two processes |
| Typical fit | Stable business, audited accounts, short gap to closing, auction | Volatile or seasonal business, weak or old accounts, a carve-out |
The mechanism you choose also shapes the rest of the deal: whether escrow is held back, how long the professional process runs, and therefore what the transaction costs — a locked box means one accounting exercise instead of two, which feeds directly into your costs and fees.
6. Which One Suits Your Deal
The practical guide is not complicated.
A locked box suits you when…
- →Your accounts are recent and audited
- →Your working capital is stable
- →The gap to closing is short
It gives you the cleanest exit available.
Completion accounts are the honest answer when…
- →Your balance sheet is old or unaudited
- →Your working capital swings with the seasons — a retailer stocking up before December, a builder with work in progress, a business with lumpy project billing
- →You are selling a division that has never had its own balance sheet — there is no reliable number to fix
What your buyer will expect
Two market patterns will shape what your buyer expects. Where a business is auctioned to several bidders, sellers push locked boxes, because every bidder prices the same balance sheet and offers can be compared on the headline number rather than on guesses about each buyer’s adjustment. Private equity sellers do the same, because a fund wants to pay its investors out and close the book, not hold a reserve against an adjustment that might land next year. On the other side, a single buyer who has done deep due diligence and found soft spots in your numbers will push hard for completion accounts, and some of their reasons will be good ones.
One last honest word. The locked box looks like the seller-friendly choice, and usually it is, but not always. If your business throws off strong cash and closing is six months away, a locked box with no interest quietly hands the buyer half a year of your profit. And completion accounts are not a trap when the rules are tightly written and the targets are set honestly against your real trading history — they simply cost you certainty and take longer.
7. The Same Argument, Had Once or Twice
In short
Underneath both, the argument is the same: how much cash, how much debt, how much working capital. A locked box makes you have that argument once, before you sign. Completion accounts make you have it twice, and the second time the buyer is holding your business and the pen.
Whichever mechanism you land on, it lives or dies in the drafting: the accounting policies, the working capital target, the permitted leakage list, the interest position and the dispute mechanism all sit in the sale of business agreement — and the version that protects you is the one written before you sign, not the one argued about afterwards.
Fixing the Price on Your Sale
MJ Kotze Inc advises sellers on the price mechanism itself — choosing between a locked box and completion accounts, setting the working capital target, building the permitted leakage list, negotiating interest on the price, and writing the accounting rules and worked examples into the agreement before signature.
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Why you can trust this: Martin Kotze has been an admitted Attorney of the High Court of South Africa, registered Conveyancer, and Notary Public since 2014, practising from Pretoria. The firm is regulated by the Legal Practice Council under firm registration 17444.
This guide is general information, not legal advice for your specific matter.