Completion Accounts vs Locked-Box vs Earn-Outs in Singapore M&A: Choosing the Right Price Mechanism

When selling a business, the headline purchase price is not always the final amount you receive.

In many M&A transactions, the parties agree on a purchase price mechanism that determines whether the price is fixed at signing, adjusted after completion, or partly dependent on the business’s future performance. This is one of the most commercially important parts of the transaction. It can materially affect your final sale proceeds, your post-closing exposure, and the likelihood of future disputes.

For Singapore sellers, the three key pricing mechanisms to understand are:

1. Earn-out mechanism
2. Completion accounts mechanism
3. Locked-box mechanism

Each mechanism solves a different commercial problem. The right choice depends on the certainty of the seller’s financials, the buyer’s comfort with the business, whether there is a valuation gap, and whether the seller wants maximum price certainty at signing or a more precise adjustment after completion.

For legal or media queries, please write to Waltson at waltson.tan@28falconlaw.com or send a WhatsApp message to ‪+65 8079 0028.

Why the price mechanism matters

Some transactions are straightforward: the buyer pays a one-off consideration at completion, and there are no further payments or reimbursements after closing.

But in many deals, the final purchase price is not fixed immediately. Instead, the definitive agreement, such as the share purchase agreement, sets out a formula or process to determine the final amount. This mechanism can have a significant impact on what the seller ultimately receives.

The key issue is this: what happens between signing and completion, and who bears the risk of changes in the business during that period?

If the parties choose completion accounts, the final price is determined after completion by reference to agreed financial metrics. If they choose a locked-box, the price is usually fixed by reference to historical accounts and there is generally no post-completion price adjustment. If they choose an earn-out, part of the seller’s proceeds depends on the future performance or milestones of the business.

Public Singapore M&A commentary similarly frames locked-box and completion accounts as alternative mechanisms for determining or adjusting consideration, with locked-box offering certainty and completion accounts allowing post-completion true-up by reference to agreed financial metrics.

Mechanism 1: Earn-outs

An earn-out is a contingent payment mechanism. The seller may receive additional payments after completion if the business achieves agreed future performance targets or milestones.

These targets may include:

• revenue targets;
• profit targets;
• operational targets; or
• other agreed milestones.

Earn-outs are typically used to bridge a valuation gap. This happens where the seller believes the business is worth more because of future growth potential, but the buyer is not willing to pay the full amount upfront because the future performance is uncertain.

In that situation, an earn-out can move the deal forward. The buyer pays a base purchase price at completion, and the seller receives additional consideration only if the business performs as agreed.

Earn-outs are fairly common in certain sectors and private equity transactions, particularly where sellers continue to manage the operations of the target after closing. It may be helpful to include worked examples or illustrations of the earn-out mechanics in the share purchase agreement to minimise disputes on how they are to be calculated.

When earn-outs help sellers

Earn-outs can be useful where:

• the business has strong growth prospects;
• the buyer and seller disagree on valuation;
• the seller is confident in the future performance of the business;
• the seller may remain involved after completion; or
• the buyer needs comfort before paying full value.

For a seller, the upside is obvious: an earn-out may allow you to capture part of the future growth that you believe the business will generate.

Seller risks in earn-outs

The main risk is that the seller may no longer fully control the business after completion. If the buyer changes the way the business is run, the earn-out targets may become harder to achieve.

For this reason, earn-outs should be drafted meticulously. They should clearly define:

• the performance targets;
• the measurement period;
• the accounting basis;
• who prepares the calculations;
• what information the seller can access;
• how disputes are resolved; and
• whether the buyer must operate the business in a particular manner during the earn-out period.

If these points are unclear, the earn-out can become a source of post-closing disputes.

Mechanism 2: Completion accounts

The completion accounts mechanism is one of the most commonly used purchase price mechanisms in M&A transactions.

Under this approach, the parties agree to a preliminary purchase price in the definitive agreement. This amount is usually paid at completion. The final purchase price is then determined after completion based on agreed financial metrics as at the completion date.

The difference between the preliminary purchase price and the final purchase price is usually settled through a purchase price adjustment approximately 30 to 90 days after completion.

What completion accounts measure

Completion accounts may refer to factors such as:

• working capital;
• assets and liabilities;
• net debt;
• other agreed financial metrics;
• a closing balance sheet; and/or
• a profit and loss account showing recent financial results.

The commercial logic is that the buyer should pay for the business as it actually exists at completion, not merely as it was estimated at signing.

This can be attractive to a buyer because it allows the price to be adjusted if the business changes between signing and completion. Put another way, completion accounts are accounts produced after completion to determine the financial position of the acquired business at the completion date, and the price is adjusted accordingly.

Key drafting points for completion accounts

Because completion accounts regulate the final price, the definitive agreement must be precise. It should clearly state:

• the accounting principles to be applied;
• which party prepares the accounts;
• when the accounts must be prepared;
• how the other party verifies the accounts;
• what happens if the parties disagree;
• who resolves disputes; and
• how any adjustment is paid.

Without clear drafting, completion accounts can become a post-closing source of dispute.

Why completion accounts can lead to disputes

The mechanism requires the parties to agree on financial calculations after completion. That creates room for disagreement. For example, the parties may dispute whether certain liabilities should be included, how working capital should be calculated, or whether the accounts were prepared consistently with the agreed principles.

From the seller’s perspective, this can be burdensome, especially if the seller is still required to manage the business after completion or assist with compiling financial information.

This is why sellers should treat the completion accounts schedule as a core commercial term, not an accounting appendix. We should highlight that completion accounts add complexity, require resources, and need the share purchase agreement to provide for the adjustment and dispute resolution process.

Mechanism 3: Locked-box

A locked-box mechanism is an alternative pricing mechanism. It is typically used where the seller wants certainty over the consideration at signing rather than waiting for a post-completion adjustment.

Under a locked-box approach, the parties agree that the final purchase price is based on the business’s most recent financial statements available at signing. The date of those financial statements becomes the locked-box date.

There is generally no post-closing price adjustment.

In a nutshell, the locked-box pricing mechanism is meant to “fix” the purchase price by reference to historical accounts, and is an alternative to completion accounts.

Why sellers like locked-box

The main seller advantage is certainty.

The seller knows the price at signing. There is no need to wait 30 to 90 days after completion for a final adjustment. There is less scope for post-closing arguments about working capital, net debt, accounting policies, or completion-date financials.

Compared with completion accounts, the locked-box approach is simpler to implement and can reduce the likelihood of disputes over the final price.

Under a locked-box mechanism, it is common for the parties to agree on the final purchase price using the company’s most recent audited financial statements, so that there is no post-completion adjustment.

Buyer protections under locked-box

Because the buyer accepts a fixed price, the buyer will usually seek protection against value leakage between the locked-box date and completion.

Leakage can include:

• dividends or distributions paid to the seller or related parties;
• unapproved payments to management or shareholders;
• excessive or unauthorised bonuses or salaries;
• returns on capital;
• shareholder debt payments;
• overhead payments;
• sale of assets; or
• other significant value transfers.

The buyer may require the seller to provide an indemnity for leakage occurring after the locked-box date but before completion. Buyers typically protect the locked-box period through leakage covenants and indemnities.

Why sellers must negotiate leakage carefully

A locked-box is not automatically seller-friendly if the leakage protections are too broad.

The seller should ensure that:

• “leakage” is clearly defined;
• permitted payments are unambiguously carved out;
• the seller’s liability is capped where appropriate;
• the time period is clear;
• buyer monitoring rights are reasonable; and
• indemnities do not create open-ended exposure.

If the seller wants a clean exit, leakage indemnities must be tightly negotiated. Otherwise, the seller may achieve price certainty in theory but retain significant post-completion risk in practice.

Completion accounts vs locked-box: which is better?

There is no universally better mechanism.

The right choice depends on factors including the business, the quality of the accounts, the buyer’s comfort, the negotiation leverage, and whether the parties prefer precision or certainty.

Completion accounts: more precise, but more complex

Completion accounts may be more appropriate where:

• the buyer wants the price to reflect the financial position at completion;
• there is a long gap between signing and completion;
• working capital or net debt may change materially;
• the buyer lacks comfort with the latest accounts;
• the business is volatile; or
• the parties expect significant movements before closing.

The downside is complexity. Completion accounts require post-completion work, verification, and potentially dispute resolution.

Locked-box: simpler and more certain, but depends on trust in the accounts

Locked-box may be more appropriate where:

• the seller wants certainty at signing;
• the financial statements are reliable and recent;
• due diligence has been substantially completed;
• the buyer is comfortable with the target’s financial position;
• the seller wants to reduce post-completion disputes; or
• the transaction needs a cleaner exit.

The downside is that the buyer assumes more risk for changes in financial performance after the locked-box date, subject to leakage protections.

To reiterate, locked-box is a common alternative to purchase price adjustment and it fixes the price or formula at an agreed valuation date.

Where earn-outs fit in

Earn-outs are different from completion accounts and locked-box.

Completion accounts and locked-box are mainly concerned with how to determine the price (consideration) based on the business’s value at or before completion. Earn-outs are concerned with future performance after completion.

Earn-outs are useful where the parties cannot agree on value today because the buyer and seller have different views on the future. They can help bridge the gap and get the deal signed.

However, earn-outs add complexity. The seller must be careful because the outcome depends on future events, often after control has shifted to the buyer.

If an earn-out is used, it should be drafted with the same level of care as the share purchase agreement / asset purchase agreement itself. The financial or operational targets should be objective, measurable, and supported by a dispute resolution mechanism.

Seller decision framework

Choose an earn-out if:

• there is a valuation gap;
• the business has strong future growth potential;
• you (the seller) may remain involved after completion;
• you are prepared to take some future-performance risk; and
• the milestones can be defined objectively.

Choose completion accounts if:

• the buyer insists on post-completion adjustment;
• working capital, net debt, or liabilities may move materially;
• the business’s completion-date financial position matters;
• the buyer wants greater precision; and
• you are prepared for post-completion accounting work.

Choose locked-box if:

• you (the seller) want price certainty at signing;
• the accounts are reliable;
• due diligence is advanced;
• leakage can be clearly defined;
• you want to reduce post-closing price disputes; and
• you are negotiating for a cleaner exit.

What sellers should ask before signing the term sheet

Before signing a term sheet or letter of intent (LOI), some of the questions which sellers should ask include the following:

1. Is the purchase price fixed, adjusted, or partly contingent?
2. If completion accounts are used, what metrics drive the adjustment?
3. Who prepares the completion accounts?
4. What accounting principles apply?
5. How are disputes resolved?
6. If locked-box is used, what is the locked-box date?
7. What counts as leakage?
8. What payments are permitted leakage?
9. If earn-out is used, who controls the business during the earn-out period?
10. What happens if the buyer changes the business after completion?

These issues should be negotiated before the definitive agreement stage. Once the term sheet sets the direction, it becomes harder to unwind the commercial position without losing leverage.

FAQ

1. What is the difference between completion accounts and locked-box?

Completion accounts determine the final purchase price after completion by reference to agreed financial metrics as at completion. Locked-box fixes the price by reference to historical accounts, usually with no post-completion adjustment.

2. Which mechanism is better for sellers?

Sellers often prefer locked-box because it gives greater price certainty and reduces post-completion adjustment disputes. However, the seller must still negotiate leakage provisions carefully.

3. Why do buyers prefer completion accounts?

Buyers may prefer completion accounts because the price can be adjusted to reflect the target’s actual financial position at completion, including working capital, net debt, assets and liabilities.

4. What is an earn-out?

An earn-out is a contingent payment mechanism where the seller receives additional consideration after completion if the business achieves agreed future targets or milestones.

5. When should I use an earn-out?

Earn-outs are useful where the buyer and seller disagree on valuation, especially where the seller believes the business will grow significantly after completion.

6. What is leakage in a locked-box?

Leakage refers to value extracted from the business between the locked-box date and completion, such as dividends, shareholder payments, unauthorised management bonuses, excessive salaries, or asset transfers.

7. Are completion accounts risky?

They can be. Completion accounts are useful but can create disputes if accounting principles, preparation timelines, verification rights, and dispute mechanisms are not clearly drafted.

8. Can earn-outs cause disputes?

Yes. Earn-outs can cause disputes in scenarios such as the following: if targets are unclear, if accounting methods are not specified, or if the buyer changes how the business is run after completion.

9. Should price mechanisms be negotiated at term sheet stage?

Typically, yes. Price mechanisms should be negotiated early because they affect valuation, closing certainty, dispute risk, and final proceeds.

10. Do I need an M&A lawyer to review the price mechanism?

We would recommend you to engage one (or a team of them), as the price mechanism is not merely a financial formula. It is a contractual risk-allocation tool that affects your final proceeds and post-closing exposure. A poorly drafted mechanism can materially reduce what you ultimately receive as a seller.

For legal or media queries, please write to Waltson at waltson.tan@28falconlaw.com or send a WhatsApp message to ‪+65 8079 0028.