Price Mechanisms and Adjustments

9.1The problem every mechanism solves

A price is always negotiated by reference to a snapshot: a balance sheet drawn up at some historical date, tested in due diligence and argued over in valuation models. But a company is not a painting. Between the snapshot and the day the buyer actually pays, the business earns or loses money. On a split signing and completion like Sunrise, that gap is many months. And if nobody stopped it, the business could pay every spare euro out to its owner as a dividend.

So every SPA has to answer the same two questions: who gets the value the target generates — or destroys — between the pricing date and completion? And how do we stop value quietly leaving through the back door? English (and European) practice has settled on two families of answer:

• Fix the price and police the box. Price the company off a historical balance sheet, declare the price final, and make the seller promise that nothing has left — or will leave — the company since that date. This is the locked box.
• True the price up afterwards. Pay an estimated price at completion, then draw up accounts showing what was actually delivered on the day, and adjust the price to match. These are completion accounts.

Around those two sit the supplements — earn-outs, escrows, retentions and deferred consideration — which do not answer the gap-period question but solve related problems: valuation gaps and credit risk. Deals are typically priced on a cash-free, debt-free basis with a normal level of working capital (Chapter 8). So the mechanism's real job is to police cash, debt and working capital across the gap.

9.2The locked box — Sunrise, up close

Project Sunrise is a locked box deal, so we can watch the machinery working. The price was negotiated off the audited Accounts of the Solaris group drawn up as at the Locked Box Date — 31 December 2025. Those accounts are the "box": Atlas priced everything in it, and the SPA fixes that price once and for all:

Notice what is not there: no adjustment for what the balance sheet looks like at completion. Whatever Solaris earns after 31 December 2025 belongs to Atlas, because economic ownership passed to the buyer at the locked box date. Generous to the buyer? Only because the seller is compensated for waiting, through the Locked Box Interest — often called a value ticker:

€4,000 a day is roughly 3.5 per cent a year on €42 million — a negotiated proxy for the profits the seller is forgoing while everyone waits for the CBI. Some deals express the ticker as a daily share of budgeted profits instead of a flat rate. Either way the logic is the same: the buyer already owns the upside, so it pays "interest" on the unpaid price. The later completion falls, the more the seller receives.

Leakage: policing the box

If the buyer owns everything in the box from 31 December 2025, then anything that flows out of the box to the seller after that date is the buyer's money leaving in the seller's pocket. The SPA calls this Leakage, and the definition is a carefully built net. Walk through its limbs — you will meet this structure on every locked box deal:

• (a) Dividends and distributions — the obvious one: any value distributed by a group company to the Seller or a Related Person, in cash or in kind.
• (b) Payments to the seller's side — management, monitoring, service and directors' fees. Fund sellers routinely charge their portfolio companies fees; after the box date, those are caught unless expressly permitted.
• (c) Transfers at an undervalue — selling the target's assets to the seller cheaply, or making the target assume the seller's liabilities, moves value just as surely as a dividend.
• (d) Waived debts — releasing money the seller's side owes the group is a gift out of the box.
• (e) Transaction bonuses — exit bonuses paid by the target reward the seller's exit with the buyer's money.
• (f) The seller's deal fees — if the target pays Farrow & Kent's or Harborne & Co's invoices, the group has funded the seller's costs of selling it.
• (g) Agreements to do any of the above — a promise made before completion but paid after it would otherwise slip the net.
• (h) The tax on all of it — if a leaky payment also triggers tax in the group, the box has lost the payment and the tax, so both are recoverable.

Against that definition sits a covenant with real teeth. Under clause 4.1 the Seller undertakes that no Leakage has occurred since the Locked Box Date and none will occur before Completion; under clause 4.2 it must confess promptly if any does; and then:

Two features deserve a close look. First, the claim window is short — nine months from completion (clause 4.4). That is fair: after completion the buyer controls the target's books, and its first post-completion review will surface any leakage. Second, and more striking: leakage claims sit outside clause 9's limitations. No €50,000 de minimis, no €420,000 basket, no cap — the only survivor is clause 9.8, no double recovery. Why? Because a leakage claim is not a damages claim about a warranty being wrong; it is the repayment of price. Atlas paid €42 million for a box with a promised amount of value in it. If €1 leaked out, Atlas overpaid by €1 and gets that euro back — no negotiated risk-sharing. The SPA even treats the repayment as a reduction of the Consideration (clause 3.4).

Permitted Leakage: the sanctioned exceptions

A business cannot be hermetically sealed for months, so every locked box has a list of Permitted Leakage — outflows to the seller's side that the buyer has priced in and sanctioned. In Sunrise, Schedule 4 permits exactly four things (plus the tax on them): the €25,000 monthly management charge Meridian levies under its management services agreement; ordinary-course salaries, bonuses and expenses for the group's own staff — expressly excluding transaction bonuses; the disclosed transaction bonus pool, capped at €350,000 plus employer taxes, for named individuals; and anything paid with the Buyer's written consent. The management services agreement, note, is terminated at completion under Schedule 2. The drafting lesson: a good Permitted Leakage schedule is itemised and quantified. Buyers resist vague carve-outs like "payments in the ordinary course" because they blur the one bright line the locked box depends on.

9.3Why sellers love the box — and what buyers need to accept one

The locked box was popularised by private equity sellers, and you can see why. The price is final at signing, to the euro plus a per diem. A fund like Meridian can tell its investors exactly what the exit returns, and can distribute the proceeds without holding reserves against a price adjustment it might lose. There is no post-completion accounting fight: no draft accounts, no expert, no six-month tail of professional fees. And in an auction, fixed-price bids are directly comparable, which keeps competitive tension high.

The buyer, meanwhile, is agreeing to pay a fixed price for a balance sheet it will not control for months. That is only rational if a few conditions hold, and your job as the buyer's lawyer is to check them:

• A reliable balance sheet at the box date — ideally audited. In Sunrise the Accounts are audited to 31 December 2025 and warranted to give a true and fair view (Schedule 3, paragraph 3.1). An unaudited management balance sheet makes a shaky box.
• Financial due diligence aimed at the box — Calder Fox's work for Atlas focused on net debt, working capital and off-balance-sheet exposures as at the box date. If the box was mispriced, no true-up will save the buyer later.
• Watertight leakage protection — a wide Leakage definition reaching Related Persons and tax, and an itemised Permitted Leakage schedule. The pre-completion covenants in clause 6.2 (no dividends, no unusual payments) stand guard over the box during the gap.
• A fair ticker — sanity-check the daily rate against the target's actual profitability; a ticker that outruns real earnings quietly raises the price every day completion slips.

If the accounts are stale, unaudited or simply not believed, the buyer should refuse the box — which brings us to the alternative.

9.4Completion accounts: pay for what you actually get

Under completion accounts (US lawyers say a post-closing purchase price adjustment), the parties agree an enterprise value and a formula, not a final number. At completion the buyer pays an estimate; then a fresh balance sheet is drawn up as at the completion date, and the price is trued up against it. The standard formula: price = enterprise value, minus actual net debt at completion, plus or minus the amount by which actual working capital is above or below a negotiated target, the peg. Working capital is stock, receivables and payables: the float the business runs on. The peg is the working capital the business normally needs: deliver less, and the buyer must inject cash on day one, so the price drops to match.

Here is a worked example — not Sunrise (which has no completion accounts), but the same deal shape with the mechanism swapped:

The process is as important as the formula, because whoever controls it controls the pressure points. Typically: the buyer prepares the draft completion accounts (it controls the books after completion) within, say, 60–90 days; the seller has 30–45 days to review and either accept them or serve a notice disputing specific line items; the parties negotiate; and anything still disputed goes to an independent expert. The expert is an accountant from a neutral firm, appointed by agreement or, failing that, nominated by a professional body. The expert acts as expert and not as arbitrator: there are no hearings or rules of evidence, and the expert applies their own professional judgement to the disputed items on paper. The determination is final and binding on both parties save for fraud or manifest error. It is quick and private compared with litigation — but it is still months of management time and professional fees after the deal is formally done.

Buyers like completion accounts because they pay for what is actually delivered: if cash walked out before completion, the price falls automatically — no leakage detective work needed. The mechanism is close to essential where there is no reliable box: carve-outs with no standalone audited accounts, distressed sales, or businesses with wildly seasonal working capital. The costs are the mirror image of the locked box's virtues: the seller has price uncertainty for months, both sides pay accountants twice, and the post-completion process is a second negotiation. That second negotiation is conducted when the leverage has shifted to whoever holds the money.

9.5The two mechanisms side by side

9.6Earn-outs: paying for the future out of the future

Sometimes the gap is not between two balance sheet dates but between two views of the future. The seller says the business will double; the buyer will not pay today for growth it cannot see. An earn-out bridges the valuation gap by splitting the price: a fixed amount at completion, plus further payments contingent on the target's performance over a measurement period. The period is typically one to three years, and the further payments are almost always subject to a cap.

The metric is the first battleground. EBITDA captures profitability but is the easiest to distort with cost allocations; revenue is harder to game but ignores costs entirely; for a payments business, processed volumes can work well because transaction flow is objective and machine-recorded. Whatever the metric, define it exhaustively, fix the accounting policies, and say precisely who prepares and who can dispute the earn-out accounts. Disputes usually go to an independent expert, on the same expert-not-arbitrator model as completion accounts.

The deeper problem is control. During the earn-out the buyer runs the business that generates the seller's money. A cynical buyer could starve it of investment, divert customers to a sister company, or load it with group management charges. This is legitimate integration, the buyer will say, while the EBITDA the seller is paid on quietly evaporates. English law will not imply a general duty to maximise the earn-out. So the seller must negotiate express conduct covenants: run the business consistently with past practice, deal with group companies at arm's length, do not divert revenue or customers away, keep separate accounting records. The buyer resists being handcuffed — it bought the business to integrate it, not to preserve it in amber. Earn-outs convert a pricing dispute into a multi-year governance negotiation — and they generate more disputes than anything else in this chapter.

9.7Escrows, retentions and deferred consideration

The last family of tools is about when the price is paid and how claims get funded, not how it is calculated. An escrow (standard in US practice, and the word American lawyers will reach for) puts part of the price into a joint account with an escrow agent, usually a bank or the lawyers. That part of the price is released to the seller on agreed dates unless the buyer has notified claims. A retention is the same idea without the agent: the buyer simply holds part of the price back. Deferred consideration is different again: part of the price is genuinely payable later (with or without interest). That means the seller is taking credit risk on the buyer, and the buyer will push for a right of set-off against warranty claims.

Release mechanics track the claims profile: a typical escrow might release half at twelve months and the balance at eighteen, less any amount attributable to claims notified but not yet resolved. Eighteen months matches the 18-month warranty period in a deal like Sunrise (clause 9.1). On caps, keep the concepts straight: an escrow secures liability but does not extend it — the warranty caps still govern how much the seller can lose. Sellers often argue the fund should be the buyer's sole recourse; buyers resist, wanting the escrow as a first pocket, not the only one. Sunrise, note, has neither escrow nor retention: Atlas is relying on Meridian's covenant strength. With a fund seller that intends to distribute proceeds to its investors, that is a real risk. Other deals solve it with an escrow or with warranty & indemnity insurance (Chapter 11).

9.8Choosing the mechanism

Mechanism choice is rarely a free intellectual exercise — it follows the negotiating dynamics of the deal. The patterns you will see:

One final, practical point. The pricing mechanism belongs in the heads of terms. It shapes the due diligence plan, the SPA architecture and the completion timetable. A party that tries to switch mechanism after exclusivity has been granted spends leverage it no longer has. "Locked box off the audited 2025 accounts, with a daily ticker" is exactly the line a well-drafted heads of terms nails down early — as Sunrise's did on 3 April 2026 (Chapter 6). With the price machinery understood, you are ready to see how the whole contract fits together: Chapter 10 dissects the anatomy of the SPA clause by clause.