Locked Box vs. Closing Accounts in M&A.

In a business acquisition, the purchase price is almost never a clean round number. It depends on how much cash sits in the company, how much debt it carries and whether working capital is at the level assumed by the parties in their valuation. The chosen purchase-price mechanism determines the reference date on which these items are measured.

This article explains how locked box and closing accounts work, when each structure is typically appropriate and why both mechanisms pursue the same objective: a fair bridge from enterprise value to purchase price.

Market practice: Europe and DACH

Percentages in this area need to be read carefully. The available market studies do not measure “the German M&A market” as a whole; they analyse transactions from specific data sets. Even so, they are useful directional evidence. According to the CMS European M&A Study 2026, 48% of European transactions in 2025 included a purchase price adjustment (PPA); in the German-speaking countries, the share was 33%. In US deals, the corresponding figure was 92%.

For locked-box data, the denominator matters. CMS measures locked-box structures within deals without a PPA. Deals that contain both a purchase price adjustment and locked-box elements are excluded from this locked-box analysis.

Deal size	PPA / closing accounts	Locked box in deals without PPA
< EUR 25m	43%	47%
EUR 25-100m	56%	69%
> EUR 100m	55%	69%

For German deals, this should not be turned into false precision by deal size. The reliable takeaway is more modest: purchase price adjustments are less common in the German-speaking region than across Europe as a whole, while locked-box structures in European mid- and large-cap transactions without a PPA are materially more frequent than in smaller deals.

The basic principle: from enterprise value to purchase price

The starting point of a transaction is usually an enterprise value based on an EBITDA multiple or a DCF valuation. That value is conceived on a cash-free, debt-free basis: it values the operating business regardless of how much cash the company holds or how it is financed. To arrive at the actual purchase price (equity value), a bridge must be built:

Equity Value = Enterprise Value + Cash-like Items - Debt-like Items ± Working Capital Adjustment

Numerical example

A simplified example: the enterprise value is EUR 10.0 million. The target has EUR 1.2 million of cash-like items and EUR 2.0 million of debt-like items. If actual working capital is EUR 0.4 million above the agreed target, the equity value is EUR 9.6 million:

Position	Amount
Enterprise value	EUR 10.0 million
Cash-like items	+EUR 1.2 million
Debt-like items	-EUR 2.0 million
Working capital adjustment	+EUR 0.4 million
Equity value	EUR 9.6 million

If working capital were instead EUR 0.4 million below the target, the equity value would fall to EUR 8.8 million. The same valuation of the operating business can therefore lead to materially different purchase prices solely because of cash, debt and working capital.

Cash-like items and debt-like items

The term cash-like items should be understood as an umbrella term. It includes not only actual cash positions such as bank balances, but also cash-equivalent assets that economically accrue to the buyer even though they are not part of the operating business and therefore could not yet be reflected in the valuation. Depending on the transaction, this may include short-term financial investments, non-operating assets, receivables from insurance claims, receivables from asset or business sales, unconsolidated shareholdings, outstanding investment grants or other financial assets.

Debt-like items is the mirror-image umbrella term for liabilities and economically debt-like positions that reduce the purchase price. In addition to bank loans and finance lease liabilities, this often includes, in practice, income tax liabilities, unpaid dividends, restructuring provisions, overdue liabilities, liabilities arising from investments or acquisitions, outstanding bonuses and management incentive payments, certain factoring or ABS effects, customer advances with a financing character, deferred maintenance and unpaid CapEx liabilities.

The difficult cases are often items that may be either operating working capital or debt-like depending on the business model. Genuine recurring factoring is not automatically financial debt; if it is used to inflate cash before the reference date or to remove receivables from working capital, the purchase-price mechanic must correct that effect. In practice, this means asking how high receivables would have been without the receivables sale and whether that effect is already captured in working capital. Customer advances can be ordinary working capital in a monthly recurring subscription or trading business, but long-term project advances may economically substitute financing. Tax items also need careful separation: income taxes on historic profits are different from VAT, payroll taxes or social-security liabilities arising in the ordinary course. CapEx is likewise not one category: expansion investments, deferred maintenance and already incurred CapEx payables require separate analysis.

The net balance of cash-like items and debt-like items is referred to as the net financial position (or net debt / net cash). Alongside working capital, it is the key lever in the equity bridge.

Especially in closing accounts deals, these categories are usually defined on a target-specific basis down to account level in a schedule to the SPA; this work often starts in Excel and is only then transferred into the transaction documents. In a locked box deal, by contrast, the equity bridge is negotiated economically between the parties; the SPA often contains only the result in the form of a fixed purchase price. A full presentation of the bridge components is not always required there.

Retained earnings and prior-year profits

A frequent misunderstanding concerns retained earnings and distributable profits. Sellers often view them as prior-year profits that should still be withdrawable. In an equity bridge, however, retained earnings are not a separate purchase-price item on top of cash, debt and working capital. To the extent prior profits have not already been distributed, they are tied up in the company: as cash, receivables, inventory, fixed assets, investments or other assets. They affect the price through the relevant balance-sheet position, not through the legal profit appropriation line.

There are three clean ways to deal with this. First, profits can be distributed before the relevant reference date; then there is less cash in the business and the bridge reflects that. Second, surplus liquidity that remains in the company can increase equity value as a cash-like item or excess cash. Third, a distribution after the locked-box date can be expressly permitted as permitted leakage. If a dividend or distribution has already been declared at the reference date but not yet paid, it is economically a liability to shareholders and typically debt-like.

What does not fit the bridge logic is an additional seller claim to “old profits” on top of the purchase price derived from cash, debt and working capital. The question is not which financial year the profit came from, but where it sits in the balance sheet at the reference date and whether that value is already reflected in enterprise value. Any distribution must also be legally permissible under applicable corporate-law and capital-maintenance rules; the bridge does not replace that analysis.

Non-cash net working capital

The working-capital adjustment concerns a third category: operating current assets and liabilities. The relevant term in M&A is non-cash net working capital – that is, net working capital excluding cash and financial indebtedness, because those items are already captured through the cash-like and debt-like items.

In practice, non-cash net working capital typically includes:

• Assets: trade receivables, inventories, prepaid expenses, prepayments and other short-term operating assets
• Liabilities: trade payables, provisions, deferred income, customer advances and other short-term operating liabilities

The working-capital adjustment ensures that working capital at the reference date corresponds to an agreed benchmark (target working capital). A twelve-month average is a common starting point, but not an automatic answer: seasonality, strong growth, project-based revenue, carve-out pro forma effects and one-off items can all distort a simple average. In those cases, the target often needs to be derived on a more driver-based or normalised basis. If EBITDA, free cash flow or the consolidation scope is normalised for valuation purposes, working capital and CapEx need to be normalised consistently as well.

If actual working capital is above the benchmark, the buyer pays more; if it is below, the buyer pays less. The key point is that the working-capital definition must not quietly include cash or debt items that are already reflected elsewhere in the bridge. This matters particularly for operating minimum cash: if it is deducted from value-increasing cash as minimum cash, the same liquidity buffer should not also be priced into a higher target working capital.

The incentive to manipulate

The working-capital adjustment is the necessary corrective to the idea of a cash-free, debt-free business. Without it, the seller could strip down operating working capital before the relevant date – for example by collecting receivables more aggressively or postponing orders – and thereby increase free cash, which would then raise the purchase price as a cash-like item. The buyer would formally receive a business valued on a cash-free, debt-free basis, but economically one with too little substance for its ongoing operations.

In closing accounts deals, this incentive can be addressed comparatively precisely because working capital is measured as of the closing date. That said, another area of tension arises there: whoever prepares the closing accounts naturally has influence over provisions, cut-off questions and other valuation judgments within the agreed accounting principles.

In a locked box deal, by contrast, the working-capital position is priced as at the historical locked-box date. There is no further closing-date true-up; later fluctuations generally sit with the buyer or the business unless they amount to leakage or another contractual breach. The key question is therefore different: is working capital at the locked-box date representative, or is that date distorted by seasonality, project business, receivable cycles or one-off effects?

Locked box

How it works

Under the locked-box mechanism, the purchase price is calculated on the basis of a historical reference date, typically the last audited annual accounts (for example 31 December of the previous year). From that date onward, the “box is locked”: the seller may no longer extract value from the business (no leakage).

The purchase price is therefore fixed already at signing. There is no post-closing adjustment.

Leakage and permitted leakage

Leakage covers all transfers of value out of the company for the benefit of the seller or persons connected with it between the locked-box date and closing:

• dividends and distributions;
• management fees paid to the seller or affiliated companies;
• repayments of shareholder loans to the seller;
• the company bearing costs of the seller; and
• seller-side transaction costs borne by the company.

Example: after the locked-box date, the target pays a management fee of EUR 200,000 to a holding company of the seller. That is a classic case of leakage – the buyer has a claim to recover that amount.

Permitted leakage consists of agreed exceptions: payments that remain allowed despite the locked-box principle, typically ongoing salaries and bonuses of management, contractually agreed supplies and services between the company and the seller, as well as transaction costs expressly permitted in the SPA.

Caution: The leakage schedule must be complete. Anything not captured as leakage falls outside the compensation regime – and that is exactly where the risk lies.

Interest (ticker)

Because the locked-box date precedes closing, the buyer benefits economically from the company already from the locked-box date, but does not pay the purchase price until closing. To compensate for that, the seller often receives interest on the share purchase price derived from the equity bridge before ticker and leakage for the period between the reference date and closing (the so-called ticker).

How that ticker is measured is a matter for negotiation. A fixed interest rate on that base purchase price is common, but the level varies considerably depending on market conditions and bargaining power. In seller-friendly structures, the ticker is instead tied to the company’s expected or actually measured cash flow during the interim period. Economically, that is no longer true retroactive effect; the seller is then simply participating in the company’s cash flow during that period. Conceptually, that is clean, but it is more cumbersome to determine and opens up fresh debates about what counts as the relevant cash flow.

Some deals therefore distinguish between a simple interest ticker and a cash ticker. In a true locked-box deal, cash, debt and working capital are generally fixed as at the locked-box date; the ticker only covers the period after that date. A cash ticker seeks to capture free cash generation between the locked-box date and closing. Its basis therefore needs to be defined carefully: is it limited to operating cash generation after the reference date, or does it also include collections of old receivables, inventory run-off, settlement of old liabilities, necessary CapEx, lease payments, taxes and interest? Without that separation, the ticker can pay or deduct value movements that were economically already embedded in the locked-box balance sheet.

When is locked box the better fit?

A locked box requires the parties to trust the historical accounts and the interim period to remain manageable. For that reason, it is typically the preferred model in three settings.

In auction processes, the seller wants price certainty and no post-closing debates. Bidders can submit a binding offer on the basis of the available numbers without the final price shifting later. That makes bids much easier to compare.

In private-equity exits, the end of the investment period usually calls for a clean cut. Open purchase-price adjustments sit uneasily with the logic of a fund that wants to return capital to its investors. Locked box offers planning certainty – at the cost of somewhat greater care in drafting the leakage schedule.

In simple business structures with a stable cash and working-capital profile, the historical reference date is often sufficiently meaningful. The same applies where purchase prices are lower and closing accounts would be disproportionate relative to deal size. In that case, locked box is often the more pragmatic tool.

Closing accounts

How it works

Under the closing-accounts mechanism, the purchase price is calculated on the basis of a closing-date balance sheet. After closing, the buyer (or its auditors) often prepares a statement of cash, debt and working capital as of the closing date. The difference from the reference values agreed in the SPA produces the purchase-price adjustment.

Process

1. Signing: The parties agree a provisional purchase price on the basis of estimated values for cash, debt and working capital as of the expected closing date.
2. Closing: Payment of the provisional purchase price and transfer of the shares.
3. Preparation of the closing accounts: The buyer often prepares the closing-date accounts within an agreed period of eight to twelve weeks after closing.
4. Seller review: The seller usually has a review period of three to four weeks in which to raise objections.
5. Dispute resolution: If the parties cannot agree, an independent auditor (Schiedsgutachter – expert determiner) decides the disputed items.
6. Purchase-price adjustment: Additional payment by the buyer or repayment by the seller.

Occasionally, the seller prepares the closing accounts, for example if it remains in control of management until final handover. More commonly, however, the buyer takes the first draft.

Accounting principles

The closing accounts are prepared in accordance with pre-agreed accounting rules (accounting principles). Those rules define which items count as cash, debt or working capital and which accounting policies apply.

The most common dispute concerns whether the closing accounts must be prepared strictly in line with the historical annual accounts (consistency) or whether corrections are allowed. The seller generally wants continuity with the historic figures; the buyer wants room to correct accounting approaches it regards as overly optimistic. Provisions, cut-off questions and inventory valuation are particularly common flashpoints. This is exactly where the financial advisers who have analysed the target’s books during financial due diligence become critical. The accounting principles must be as detailed as possible – a generic reference to German GAAP principles under the HGB is often not enough.

When are closing accounts the better fit?

The closing-accounts mechanism is more cumbersome, but closer to the economic reality at the time control passes. It makes sense where a historical reference date no longer reflects that reality reliably and the expected deviation economically outweighs the additional effort and dispute potential.

With a long interim period – for example because regulatory approvals or merger-control clearance are required – cash, debt and working capital may shift materially between signing and closing. If closing takes place six or nine months after signing, a purchase price based on historical figures carries a risk that neither side could properly price. The closing-accounts mechanism captures those changes.

With volatile business models – for example businesses with seasonally fluctuating working capital, project-based revenues or high receivables – a historical reference date is often of limited value. Anyone acquiring a trading business that doubles its working capital in December and runs it down again by March will want to know what the business actually looks like at closing.

From the buyer’s perspective, the mechanism also offers more control: the buyer often prepares the closing accounts, bears the burden of substantiating its figures and has the first draft. From the seller’s perspective, this creates a strong interest in clear deadlines, robust objection rights and a carefully balanced expert-determination mechanism.

Comparison

Criterion	Locked Box	Closing Accounts
Price certainty	High (price fixed at signing)	Low (final price only known months after closing)
Post-closing disputes	Only around leakage	Frequent (valuation questions, accounting principles)
Interim-period risk	With the buyer (reference date before closing)	Shared (adjustment at closing)
Leakage protection	Yes (contractual)	Not needed (adjustment at closing)
Transaction costs	Lower (no post-closing process)	Higher (closing accounts, expert determination)
SPA complexity	Lower	Higher (accounting principles, dispute resolution)
Typical use case	Auctions, PE exits, simple structures	Bilateral deals, long interim periods, volatile business models

Hybrid structures

In practice, the choice between locked box and closing accounts is usually binary. Even so, hybrid structures occasionally appear.

What is often meant is not a genuine mixed model, but a narrowed adjustment logic: for example, a closing-accounts deal in which only working capital is adjusted, but not cash or debt. Conversely, a locked box can include carve-outs for particularly uncertain items, such as an ongoing tax audit. Those are not a separate third category, but transaction-specific modifications of the relevant basic model.

A distinct variant is the forward locked box. It is used mainly where the deal is signed in the last quarter of the year, but closing cannot take place until after the next balance-sheet date, for example because merger-control clearance is still pending. The settlement then takes place on the basis of the annual accounts prepared in the meantime. Technically, these are not true closing accounts, because the closing date is not the relevant date. Even so, the structure requires comparable mechanisms in order to derive the relevant equity-bridge components from those annual accounts.

Common mistakes

1. Working capital not defined. If a closing-accounts SPA does not clearly define non-cash net working capital – in other words, which items count, which calculation method applies and how cut-off questions are treated – the dispute is built in from the outset. A simple twelve-month average is often not enough for seasonal, high-growth, project-based or carved-out businesses.

2. Cash-like and debt-like items not defined with sufficient precision. Without a robust definition of the relevant positions, grey areas arise that both sides can use tactically. Factoring, customer advances, tax items, CapEx payables and deferred maintenance should be classified expressly rather than treated as generic balance-sheet noise.

3. Double counting and overlap with warranties not excluded. Anyone who does not align the purchase-price mechanism consistently with the rest of the SPA risks two classic problems. First, the same issue – for example a disputed receivable or a provision – may affect both the net financial position and working capital, thereby influencing the purchase price twice. Second, a matter already reflected through the purchase-price mechanism (closing accounts or locked box) may simultaneously trigger a warranty claim and lead to a second recovery. Both problems can be avoided only by harmonising the SPA as a whole: the purchase-price mechanism, the warranties and the indemnity regime must be coordinated as one system.

4. Leakage schedule too narrow. A locked-box SPA without a complete leakage schedule leaves room for the seller to extract value between the reference date and closing without any compensation mechanism being triggered.

5. Accounting principles too vague. “In accordance with the HGB and past accounting practice” is a starting point, but not a substitute for a detailed definition of the accounting methods for the items most likely to generate disputes. Here again, provisions, cut-off questions and inventory valuation are exactly where the financial advisers who have analysed the target’s books are needed.

6. No expert-determination mechanism for closing accounts. Without a contractual dispute-resolution mechanism for the closing accounts, the parties are left with ordinary court proceedings or arbitration – both of which materially increase the cost and duration of the dispute.

7. Ticker forgotten in a locked-box deal. If several months lie between the reference date and closing and no interest is agreed, the seller is economically subsidising the buyer during that period.

Both mechanisms can be modelled by reference to concrete scenarios using the Equity Bridge calculator. But anyone negotiating the purchase price is always also negotiating the economic allocation of risk for the deal as a whole. That is exactly where it is decided whether the price will later be regarded as fair – or become the starting point of the next dispute.