October 17, 2023 | less than a minute read

Between locked box and closing accounts– hybrid purchase price formats

Get in touch

Nikolaus von Jacobs

Partner

Get in touch

Nikolaus von Jacobs

Partner

The Price Mechanism is the heart of the Purchase Agreement and the hinge between lawyers and M&A advisors and Private Equity Funds.

In theory, M&A and Private Equity practitioners have the choice to determine the purchase price either via closing accounts or via a locked box mechanism. Whereas both mechanisms have pros and cons, in practice often a "one size fits all" solution does not meet all needs.

This leads to innovative formats which address the practical challenge resulting from distant effective dates and the need to bridge the uncertainties of longer periods not covered by financial statements.

These solutions can be supported by Warranty & Indemnity Insurance structures.

Aspects of these new hybrid purchase price formats are until now rarely discussed in the relevant literature. The article in the link sheds light on the mechanics and application of these new hybrid formats.

A key aspect of the share purchase agreement in private equity and M&A transactions is the purchase price mechanism. Two standards are common when determining the purchase price: (i) closing accounts and (ii) locked box. [...] Certain hybrid formats have evolved in recent years. [...] A particular challenge arises when the effective date under locked box is distant. [...] This can occur, for example, where the deal is signed later in a year with the envisaged closing date to be (1) at the year-end or (2) in the beginning of the new year. This is even more relevant when (3) a signing is to occur early in the new year, with the preceding year’s accounts not yet drawn up. [...] In these scenarios, there are two different approaches one could take.