A food business is sold for an enterprise value of Rs 1,000 crore. Work out the equity price under a locked box and under completion accounts, and say which side prefers which.

The locked box gives an equity price of Rs 785 crore and completion accounts Rs 800 crore. The locked box takes 31 March net debt of Rs 200 crore and deducts Rs 15 crore of leakage. Completion accounts take closing net debt of Rs 180 crore and deduct a Rs 20 crore working capital shortfall. Sellers usually prefer a locked box for its certainty; buyers prefer completion accounts because they pay for the balance sheet they actually receive.

Because the buyer pays for the shares, and the shares are worth the enterprise value less the debt the company carries. Both mechanisms subtract net debt and adjust for working capital; they differ only in which day's balance sheet they use. Buying a house with a loan on it works the same way: you agree a price for the house, then deduct whatever is still owed to the bank, and you must agree on which day you read that loan balance.

The price is fixed from the 31 March accounts: Rs 1,000 crore less Rs 200 crore of net debt, Rs 800 crore. From that date the business is run for the buyer's account, so any value paid out to the seller is leakageValue passed to the seller or its affiliates after the locked box date, such as dividends, fees or asset transfers, which the seller must repay or deduct.. The Rs 10 crore dividend and Rs 5 crore of fees are leakage, so the price is Rs 785 crore. The cash Ilaksh earned after 31 March stays in the business and belongs to the buyer.

The price is set from the balance sheet on closing day, so it is trued up after closing once the accounts are drawn up. Net debt is Rs 180 crore. Working capital is Rs 140 crore against a Rs 160 crore pegThe normal level of working capital agreed in the contract; the price rises or falls by any difference at closing., so the buyer receives Rs 20 crore less of stock and receivables than a normal business needs, and the price falls by Rs 20 crore, to Rs 800 crore. Note how the two adjustments interact: part of the fall in net debt came from running down working capital, collecting receivables and holding less stock. The peg catches that.

In general, sellers prefer a locked box because the price is known at signing and there is no post-closing argument, and buyers prefer completion accounts because they pay for the balance sheet they actually get. On these numbers completion accounts pay the seller Rs 15 crore more. Ilaksh generated cash after 31 March, about Rs 35 crore before the leakage, part of it by squeezing working capital; under a locked box that cash belongs to the buyer. That is why sellers in a locked box usually ask for a daily ticker, an agreed amount added to the price for each day from the box date to closing, to be paid for the profits the business earns in between.