There must be another way…
When buying or selling a business, how you agree to finalize the financials can lead to either smooth sailing or choppy waters. We’ve supported many clients through the frustrating journey that can result from completing accounts. This method, though common, often ends up being a major headache, leading to disputes and, in some cases, even legal battles. In fact, research by Grant Thornton highlights that completion accounts are the number one cause of disagreements between buyers and sellers, with a notable 10% escalating to legal action.
The other way
However, there’s another path less trodden in the SME sector: the Locked Box mechanism. This alternative is gaining traction for its simplicity and efficiency. Unlike completion accounts, where the final price is adjusted based on the financials at completion, Locked Box sets the price using historical accounts. This method locks in the business’s value at a point in time before the deal closes, potentially making the process smoother and less contentious.
The Locked Box approach can be particularly appealing to sellers, as it provides certainty about the sale price earlier in the process. Buyers, too, can find value in this method, especially in transactions involving businesses with straightforward financials. The lack of post-completion adjustments can simplify the deal and reduce the risk of disputes.
But nothing is perfect!
However, the Locked Box method is not without its challenges. The period between setting the Locked Box accounts and completing the sale requires careful management. During this interim, the seller remains in control of the business but doesn’t benefit from any value created thereafter. This situation can lead to a lack of motivation for the seller, potentially affecting the business’s performance and, by extension, its value to the buyer post-sale.
This dynamic underscores the importance of clear agreements and strong management during the transition period. Both buyers and sellers need to understand the implications of the Locked Box mechanism and ensure that the business continues to operate effectively until the transfer of ownership is complete.
Conclusion
In conclusion, while Locked Box offers a compelling alternative to completion accounts, it’s essential to weigh its benefits and challenges carefully. The right choice depends on the specific circumstances of the deal, the nature of the business, and the priorities of the parties involved. As the SME landscape evolves, understanding and leveraging different accounting methods in M&A can be a powerful tool in achieving successful outcomes.
