Pricing mechanisms in M&A practice: closing accounts

I previously wrote an article about the locked box method as a pricing mechanism in takeover practice. As I mentioned in that article, the purchase price in company takeovers is usually determined using either the locked box or the closing accounts method. This article focuses on the latter mechanism. What does it entail, when is it applicable, and what do the parties need to bear in mind from a legal perspective?

What are closing accounts?

In closing accounts, a provisional purchase price is used in the purchase agreement. This price is based on a balance sheet date in the past or an estimate of the financial position at the time of transfer. A so-called provisional acquisition balance sheet is then drawn up, which reflects the financial position of the company as accurately as possible. Because the items on the balance sheet change during the year, any expected deviations are already incorporated into this provisional price. The aim is to arrive at a valuation that is as close as possible to the fair value.

After the date of transfer of the shares (usually 1 to 4 months later), this provisional price is adjusted based on the actual value determined using the valuation method specified in the purchase agreement. A final acquisition balance sheet is then drawn up. The provisional acquisition balance sheet and the final acquisition balance sheet are then compared, after which any corrections to the purchase price are made.

The agreement often also includes an obligation for the seller to continue to manage the company in line with historical policy until the legal transfer. This is to prevent the seller from artificially inflating the cash position, for example by postponing payments to suppliers or accelerating the collection of receivables.

This approach requires careful and detailed coordination, as the final purchase price is not yet fixed at the time of signing. The parties must clearly establish which balance sheet items determine the price, such as net debt or working capital. They must also agree on the accounting principles to be applied, who is responsible for preparing the figures (e.g., an external auditor), and how any differences of opinion will be resolved.

The pricing mechanism must be distinguished from the valuation method: there are several valuation methods for determining the value of the company. The pricing mechanism determines the date on which the valuation method is applied.

Advantages and disadvantages for parties

This method has clear advantages for the buyer. They do not pay for expectations or forecasts, but for the actual situation at the time of transfer. If the company’s performance deteriorates between signing and closing, they simply pay less.

For the seller, the situation is different. The proceeds from the sale are only determined at closing, which can lead to uncertainty. Instead of certainty about the purchase price received when signing the agreement, this only becomes clear at closing. This can have both positive and negative consequences for the seller. Moreover, there is a risk of discussion. Differences of opinion about the valuation of items, such as doubtful accounts receivable or the classification of certain costs, can lead to delays or disputes.

Example

Suppose a company is sold in January 2025. The provisional purchase price is set at €12 million upon signing. On February 28, 2025, the closing date, an acquisition balance sheet is drawn up. This shows that the working capital is €400,000 below the agreed target. In accordance with the pre-determined calculation method, the final purchase price is adjusted to €11.6 million. If this method had not been carefully defined, the parties could have ended up in a lengthy dispute over the difference.

Conclusion

The closing accounts method is an accurate way to align the purchase price with economic reality. This is valuable, especially for dynamic companies or uncertain market conditions. But that accuracy comes at a price: it requires time, preparation, and legal precision. Anyone who chooses this method as a seller or buyer must realize that its success depends on clear agreements.

Questions?

Would you like assistance in drawing up these agreements or structuring a closing accounts process? I would be happy to help you with a practical and legally sound approach.