Locked box or completion accounts when rates are falling

With the ECB deposit rate at 2%, a ticker set as interest on the equity price now pays the seller less than the cash the business produces. How to set the ticker, where the leakage schedule causes friction, and when completion accounts still make sense.

On 5 June the ECB cut its deposit facility rate to 2.00%, effective 11 June. It was the eighth cut since June 2024, from a peak of 4% held from September 2023 to June 2024. Three-month Euribor has moved with it, from about 2.7% in January to around 2% this month.

That changes the arithmetic of the locked box, which is already the default in French mid-market auctions. In the CMS European M&A Study 2024, France used a purchase price adjustment in only 38% of deals, and three-quarters of the deals without one were locked boxes. The 2025 edition, published in March, reports more locked boxes again among deals without an adjustment. Sellers in competitive processes this spring have asked for a locked box almost by reflex. Most of them have not looked again at how the ticker is set.

What the ticker is for

In a locked box, the economic risk and reward pass to the buyer at the locked box date, but the seller still owns the company and its cash until completion. The ticker (or "value accrual") compensates the seller for the profit generated in between. It is usually a daily amount added to the fixed price from the locked box date, or from signing, until completion.

There are two ways to set it. The first is a rate applied to the equity price, often close to the buyer's cost of funding. The second is the cash the business actually generates over the period. When rates were near zero after 2009, many sellers moved from the first method to the second, because a rate-based ticker was paying them almost nothing. With rates falling again, the same logic applies.

A worked example

Take a business services target with €5m of EBITDA, priced at 9.5x. That is the Argos Index mid-market median for Q1 2025. This gives an EV of €47.5m and, after net debt, an equity price of €40m. The locked box date is 31 December 2024 and completion is expected on 30 June 2025, 181 days later. Free cash flow after tax, interest and maintenance capex runs at about €2.8m a year.

At 2%, the seller gives up around €1m of cash that has built up in the business and is passed to the buyer. On a €40m equity price that is 2.5%, more than many of the specific points argued over in the SPA. A buyer who signs a rate-based ticker at today's rates is getting a discount that was never really negotiated.

Calibrating the ticker on cash generation

When we act for a seller, we now recommend a ticker based on cash generation rather than on a rate. In practice:

1. Define the cash measure. The ICAEW guidance describes a cash-profit basis: profit before depreciation and amortisation, after interest and corporation tax. We also deduct maintenance capex, because the buyer will check it, and it is better to deal with it before the buyer raises it.
2. Use actuals, then forecast. Use the management accounts for the months from the locked box date to signing. For the months from signing to completion, use the budget. The buyer will compare that budget with year-to-date trading, so it needs to be credible.
3. Remove seasonality. If cash peaks in Q4 and the gap runs from January to June, a simple annual average overpays the seller. Use the monthly profile for the actual months covered.
4. Exclude one-offs. Disposal proceeds, insurance receipts and the release of provisions are not cash generated by trading.

When we act for a buyer, the argument goes the other way. If the seller wants a cash-based ticker, the buyer can fairly ask for a cap, a cut-off at a long-stop date, and a ticker that runs from signing rather than from the locked box date. The point is to agree the basis first and the amount second.

The permitted-leakage list is where the deal is won or lost

Fixing the price leaves one thing to protect: value leaving the company before completion. The SPA prohibits leakage, typically dividends, returns of capital, transaction costs borne by the company, payments to directors and deal bonuses, and non-ordinary-course intra-group flows. The seller indemnifies the buyer euro for euro for any of these. Permitted leakage is the list of exceptions.

In small and mid-cap deals, most of the negotiating time goes on that list. The items we see most often:

• Management fees to the selling fund or holding company. Acceptable if they are contractual, priced in the model and capped at a monthly amount. Not acceptable as "fees in the ordinary course".
• Founder remuneration. Salary is usually permitted, but bonuses decided after the locked box date, often in March or April after the year-end, are not, unless they are named and quantified.
• Transaction costs. Advisers' fees paid by the target are leakage unless the price already reflects them. We reconcile the fee letters in the data room against the costs recorded after the locked box date.
• Tax on leakage. A €100k bonus costs the company more once social charges are added. The indemnity should cover the gross cost.

The general rule: every permitted item should be named, quantified and already reflected in the price. "Payments in the ordinary course" on its own is not a permitted item; it leaves a gap that the parties will argue over after completion.

When completion accounts still make sense

The locked box is not always the right answer, even for a seller. Completion accounts measure cash, debt and working capital at completion and adjust the price after the event. They remain the better tool in three situations.

The business is seasonal. If working capital swings by €3m between the low point and the peak, a December locked box balance sheet tells the buyer little about what it will receive in June. A locked box can still be made to work with a recent locked box date and month-specific targets, but completion accounts with a normalised working capital target, built on twelve monthly averages, are often cleaner.

The locked box balance sheet is weak. A locked box needs a reliable, ideally audited or vendor-reviewed, balance sheet. If the most recent accounts are management accounts with no year-end cut-off, a carve-out with estimated intra-group balances, or a balance sheet with unreconciled accruals, the buyer is pricing on numbers it cannot rely on. Either the buyer applies a discount to cover that risk, or the parties use completion accounts.

The gap to completion is long or uncertain. Merger control, foreign investment screening or lender conditions can stretch the timetable to six months or more. The longer the gap, the more the ticker amount matters and the more value can leak out. Beyond about six months, we generally advise against a locked box.

What to do

• Sellers: before the process letter goes out, model the ticker on cash generation for the expected gap and compare it with a rate-based ticker at 2%. If the difference is material, set the cash basis in the draft SPA.
• Buyers: if the seller offers a rate-based ticker, accept it, but check that the locked box date is recent and that the gap is short. If the seller asks for a cash-based ticker, ask for a cap and a signing start date.
• Both: prepare the permitted-leakage schedule from the general ledger for the period after the locked box date, not from a template. Every line should show a counterparty, an amount and a reference to the price model.
• Seasonal or weak balance sheets: run both mechanisms on the same numbers before the LOI. If the locked box only works with month-specific targets and three specific indemnities, use completion accounts.

This note is general information, not advice on a specific transaction.