A buyer agreed a locked box price of Rs 500 crore. Before completion the seller took a Rs 12 crore dividend and Rs 3 crore of management fees. What is the buyer owed, and how would completion accounts have changed the price?

The buyer is owed Rs 15 crore, so the family nets Rs 485 crore; under completion accounts the price would have been about Rs 505 crore. In a locked box, economic ownership passes at 31 March, so the Rs 20 crore the business earns afterwards is the buyer's, and anything the seller takes out comes back rupee for rupee. Completion accounts price off net debt at 31 July instead, so the seller is paid for the cash earned and the leakage is netted automatically.

The buyer, economically, from the box date. Think of buying a flat with a sale deed dated 1 April and possession on 1 August: if the owner rents it out in between and pockets the rent, you expect that rent back, because the flat was already yours. A locked box fixes the price at the box date and moves the business's profits and risks to the buyer from that day; the seller's only promise is that nothing of value leaves the company to it. That promise is the leakageAny transfer of value from the target to the seller or its connected parties after the locked box date: dividends, fees, bonuses, waived debts, assets sold cheap. covenant, and it is backed by a rupee-for-rupee indemnity.

Go down the list and ask of each item: did value go to the seller, and did the agreement allow it? The dividend and the fee went to the family and were not permitted, so the buyer is owed Rs 12 plus Rs 3, Rs 15 crore, and the family nets Rs 485 crore. The salaries went to the family too, but they were negotiated in advance as permitted leakage, which is the right way to handle a cost the business would have paid anyway. In practice the claim is settled by reducing the completion payment, or by an indemnity if it is found later; the effect is the same.

Completion accounts fix the enterprise value and work out the equity price from the balance sheet on the day the deal closes. Enterprise value is Rs 500 plus Rs 100, Rs 600 crore; net debt at 31 July is Rs 100 less the Rs 20 crore earned plus the Rs 15 crore paid out, Rs 95 crore; so the equity price is about Rs 505 crore. The leakage needs no separate claim, because cash that left the company raised net debt and cut the price automatically.

Each moves a different risk. In a locked box the buyer takes the trading risk from the box date and the seller gives up the cash earned after it, which is why sellers usually ask for a tickerA daily amount, often an interest rate on the equity price, added to a locked box price to pay the seller for the profits it gives up between the box date and completion. on the price. Without a ticker, a four-month gap between box date and completion costs the family Rs 20 crore here, and they should have negotiated for it. Completion accounts protect a buyer against a business that deteriorates before closing, at the cost of a post-completion dispute over the accounts. The limitation: this case assumed working capital stayed normal; in real completion accounts the working capital true-up is where most of the argument happens.