A contractual mechanism that allows the purchase price of an acquisition to be modified between signing and closing (or after closing) to reflect changes in net debt, cash, and working capital.
In M&A, the price agreed in the letter of intent almost never matches the price ultimately paid. The reason is straightforward: the value of a company fluctuates between the day a price is agreed and the day the transaction closes. Cash goes up or down, debt changes, working capital moves. Price adjustment mechanisms are the contractual tools designed to ensure the final price reflects the reality of the business at the moment of closing.
A price adjustment is a mechanism in the SPA (sale and purchase agreement) that allows the share price to be modified after signing to account for changes in certain financial metrics between a reference date and the closing date.
The logic is simple. In an M&A transaction, the parties agree on an enterprise value based on an EBITDA multiple. To arrive at the equity value (the price the buyer actually pays for the shares), this formula applies:
Equity Value = Enterprise Value - Net Financial Debt + Excess Cash +/- Working Capital Adjustment
Each of these components can fluctuate between the date the price is agreed and the closing date. The price adjustment ensures these movements are reflected in the final price.
Under this model, the price is adjusted after closing based on the company’s financial position at the closing date. The process is:
Advantage: The price accurately reflects the financial reality at the moment of closing. Disadvantage: It creates post-closing uncertainty (neither party knows the final price until the accounts are finalised) and is a common source of accounting disputes.
Under this model, the price is fixed definitively based on financial statements from a reference date prior to closing (usually the most recent audited annual accounts or an interim balance sheet). There is no post-closing adjustment.
Advantage: Price certainty for both parties. No post-closing accounting disputes. A cleaner process. Disadvantage: The buyer assumes the risk of changes between the locked box date and closing. If the company’s financial position deteriorates during that period, the buyer pays a price that no longer reflects current reality.
The working capital adjustment deserves specific attention because it generates the most disputes in practice.
Working capital is the difference between current operating assets (inventory, trade receivables) and current operating liabilities (trade payables). It is the cash the company needs to fund its day-to-day operating cycle.
During negotiation, the parties agree on a “normalised” working capital level — the average level needed for the business to function. If actual working capital at closing exceeds the normalised level, the buyer pays the difference (they are receiving more current assets than necessary). If it falls below, the price is reduced (the business will need a cash injection to operate normally).
The dispute arises in defining what is “normal.” Which items are included in working capital? How are provisions treated? What reference period is used? These questions must be precisely defined in the SPA to prevent post-closing conflicts.
Blue Mountain agrees to acquire an electronic components company at an enterprise value of 22 million euros. The agreed mechanism is closing accounts:
Provisional price paid at closing: 16 million (based on estimated net debt of 4 million, excess cash of 500,000, and normalised working capital of 3.2 million).
Closing accounts (prepared 75 days later):
Net adjustment: +300,000 (debt) + 100,000 (cash) - 300,000 (working capital) = +100,000 euros in the seller’s favour.
Final price: 16,100,000 euros.
The adjustment is modest (0.6% of the price), indicating that the estimates were reasonable. In transactions where estimates are less reliable, adjustments can exceed 5% of the price, generating significant tension between the parties.
It depends on the perspective. Sellers tend to prefer locked box because it offers price certainty and avoids post-closing disputes. Buyers tend to prefer closing accounts because the price reflects exact reality at the moment of closing. In the European market, the locked box has gained significant popularity over the past decade and is now the dominant model in seller-led processes. Blue Mountain works with both models depending on the circumstances of each transaction.
Typically the buyer (since it controls the company after closing), based on the accounting policies defined in the SPA. The seller has the right to review them and raise objections. If no agreement is reached, an independent auditor (expert determination) intervenes, and their decision is usually binding.
Under a locked box model, the SPA defines in detail what is permitted (permitted leakage: normal salaries, ordinary operating payments, taxes) and what is not (non-permitted leakage: extraordinary dividends, non-standard related-party payments, debt forgiveness). If non-permitted leakage occurs, the seller must indemnify the buyer euro for euro. This is the buyer’s primary protection in a locked box model.
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