Locked-Box vs Completion Accounts:
which pricing mechanism for your UAE M&A deal.

Every M&A transaction has to answer two pricing questions: what is the price? and how is it delivered? The first attracts most of the attention; the second decides how the deal actually plays out between signing and completion.

There are two standard mechanisms. Each has different consequences for the buyer's deal risk, the seller's certainty, the speed of the transaction, and the likelihood of a post-completion dispute. Choosing well requires understanding what each is actually for.

The locked-box mechanism.

Under a locked-box, the purchase price is fixed at a historical balance-sheet date — the 'locked-box date' — typically the most recent audited or management balance sheet available when the SPA is signed. The seller warrants that no leakage has occurred since that date, and the buyer effectively gets the economic benefit of the business from the locked-box date forward.

The key features:

• Price certainty. The buyer pays a fixed cash amount at completion. No true-up.
• Economic benefit from locked-box date. Profits earned between locked-box and completion belong to the buyer (sometimes with a daily-rate equity ticker payable to the seller for the deferral of consideration).
• Leakage protection. A negotiated list of 'leakage' items (dividends, management bonuses, related-party payments, asset transfers, indemnity payments) is prohibited between locked-box and completion. A negotiated list of 'permitted leakage' carves out ordinary-course items.
• Faster completion. No completion accounts to prepare, deliver, review and dispute.

The completion-accounts mechanism.

Under completion accounts, the headline price is an estimate. At completion, the buyer pays an estimated price; within an agreed period after completion (typically 30–60 days) the parties prepare 'completion accounts' that calculate the actual cash, debt, working capital and any other agreed metrics at the completion date; and the price is adjusted up or down accordingly.

The key features:

• Actual price. The buyer pays for the business as it actually is at completion, not as it was months earlier.
• Post-completion adjustment. Either party may have to pay the other after completion to true up the price.
• Dispute mechanism. The SPA includes a dispute-resolution process for completion accounts disputes — typically an expert determination by a 'big four' accounting firm.
• More risk on definitions. Every accounting convention has to be specified — what counts as cash, what counts as debt, how working capital is calculated. Disputes typically arise from ambiguity in these definitions.

When to use locked-box.

Locked-box is generally preferable when:

• The target has reliable financial reporting and a recent clean balance sheet (audited where possible).
• The target's business is relatively stable month-to-month — no significant working-capital swings, no large one-off items.
• The seller has negotiating leverage — a controlled-sale or auction process where multiple bidders compete on certainty as well as price.
• The transaction needs to close quickly — no time for a completion-accounts process.
• Both parties want a clean break at completion — sellers and buyers want to walk away rather than spending months on completion-accounts disputes.

When to use completion accounts.

Completion accounts are generally preferable when:

• The target has volatile working capital — seasonal businesses, project-based revenue, fluctuating debtor positions.
• Recent financial reporting is unreliable — management accounts only, no recent audit, or significant adjustments needed.
• The buyer has negotiating leverage — the buyer wants to pay for what they actually receive, not for what they're told they will receive.
• The target is being carved out of a larger group — the carve-out balance sheet is being constructed and a locked-box would lock in unproven numbers.
• The transaction involves significant financial restructuring between signing and completion.

The leakage trap — and how to draft around it.

Most locked-box disputes turn on what counts as 'leakage' versus what counts as 'permitted leakage'. The general rule is:

• Leakage (prohibited): any transfer of value from the target to the seller or its connected persons that is not in the ordinary course on arm's-length terms.
• Permitted leakage (allowed): ordinary-course salary, ordinary-course tax payments, ordinary-course intra-group trading on arm's-length terms, and specific items disclosed in the SPA.

Common drafting failures:

• Vague permitted-leakage definitions. 'Ordinary course' without a benchmark almost always produces a dispute. Quantify where possible (e.g. 'ordinary-course salaries consistent with the 12 months prior to the locked-box date').
• Missed categories. Director loans, intra-group cash sweeps, IP licensing fees, management charges, advance payments to suppliers controlled by the seller — these need to be specifically addressed.
• Tax leakage. If the target group's tax position changes between locked-box and completion (e.g. a tax refund is received), the buyer should benefit from the refund — but only if the SPA says so.

The completion-accounts trap — and how to draft around it.

Completion-accounts disputes typically turn on definitions. The most contested:

• Cash vs cash-equivalents. Restricted cash, customer deposits, trapped cash in foreign jurisdictions — all need to be addressed.
• Debt vs liabilities. Lease liabilities under IFRS 16, deferred revenue, accrued bonuses, dilapidations provisions, contingent consideration on prior acquisitions — each requires a clear treatment.
• Working capital target. The reference working-capital level the target is expected to deliver. Get this wrong and either the buyer or the seller suffers a windfall.
• Accounting policies. The accounting policies and conventions to be applied — IFRS, US GAAP, management adjustments. A change in policy between locked-box and completion can swing the price by millions.

The SPA should attach the actual locked-box balance sheet (locked-box) or the actual working-capital target build (completion accounts), with the conventions and adjustments explicitly stated. Disputes arise when these schedules don't exist or are too high-level to be enforceable.

The interaction with W&I insurance.

Warranty & Indemnity (W&I) insurance changes the calculation. Insurers typically:

• Will insure locked-box leakage warranties (subject to a sub-limit and exclusions for known leakage).
• Will insure completion-accounts warranties on the same basis as other warranties.
• Charge a similar premium on either mechanism.

The practical effect: on insured deals, the choice between locked-box and completion accounts is rarely insurance-driven. It is driven by the underlying commercial dynamics — speed, certainty, working-capital volatility, and negotiating leverage.

Conclusion.

The pricing-mechanism choice is one of the highest-leverage decisions in any M&A negotiation. Get it right and the transaction completes cleanly with both parties moving on. Get it wrong and the deal lives on in completion-accounts disputes or leakage claims long after the headline announcement.

Neo Legal advises buyers and sellers on pricing-mechanism selection at term-sheet stage — when the negotiating leverage is at its highest and the structuring options are widest. Once the SPA is in draft, the lever is much smaller.