The Visible Price Is Rarely the Real Price: Key Structures in M&A Pricing – American vs. European Practices.
In M&A transactions, the headline price is often just the starting point of a much more complex structure. While many sellers focus exclusively on maximizing the announced price, seasoned buyers understand that the true price is determined in the details: pricing mechanisms, post-closing adjustments, and contractual structures.
This article explores how pricing engineering in M&A can significantly reshape the real value of a deal. We will analyze the two most widely used international pricing frameworks:
- Completion Accounts (American practice)
- Locked Box (European practice)
We will also review common negotiation errors that directly erode the effective price received by the seller.
Completion Accounts: Post-Closing Adjustments – The American Standard
The Completion Accounts structure is the most common pricing mechanism in the U.S. and in deals where buyers seek granular control of the target’s financials at closing.
Key features:
- The purchase price is agreed on a provisional basis.
- Final price adjustments are made post-closing, typically based on working capital, net debt, and cash at closing.
- Auditors and financial advisors are often involved in validating the adjustment figures.
Advantages:
- Protects the buyer against fluctuations in the target’s financials between signing and closing.
- Accurately reflects the target’s financial position at the actual closing date.
Risks:
- Potential for post-closing disputes regarding adjustment calculations.
- Creates price uncertainty for the seller, sometimes for several months after closing.
- The final price may deviate significantly from the initially agreed headline price.
Locked Box: Fixed Price with Leakage Protection – The European Standard
The Locked Box model is widely used in Europe, particularly when the parties seek price certainty and process efficiency.
Key features:
- The purchase price is fixed based on an audited balance sheet at a date prior to signing.
- No post-closing adjustments are permitted, except for unauthorized value leakages.
- Requires high confidence in the accuracy of historical financial information.
Advantages:
- Provides full price certainty from signing.
- Accelerates integration and reduces post-closing friction.
- Eliminates complex price adjustment processes.
Risks:
- The buyer assumes the risk of financial changes between the locked box date and closing.
- May require additional contractual protections (retentions, indemnity clauses).
Pricing Beyond the Headline: Adjustments That Define the Real Price
Regardless of the pricing structure, negotiating the following adjustments carefully is critical to protect the economic value of the transaction:
- Target vs. actual working capital adjustments.
- Net debt adjustments at closing.
- Earn-outs or contingent payments based on future performance.
- Purchase price retentions to cover undisclosed liabilities.
- Leakage penalties in Locked Box structures.
These mechanisms can significantly impact the seller’s effective proceeds and the buyer’s risk exposure.
Common Pricing Mistakes in M&A Negotiations
- Focusing solely on the headline price while ignoring pricing adjustments.
- Underestimating the impact of working capital targets on the final price.
- Failing to secure proper technical advisory for price adjustment calculations.
- Accepting poorly defined earn-out structures or unrealistic performance metrics.
- Assuming Locked Box structures always favor the seller without adequately controlling for value leakages.
Conclusion
In M&A, the visible price is rarely the real price. Companies that overlook pricing mechanics, adjustment methodologies, and contractual nuances may end up receiving far less than anticipated.
At SAJOR Consulting, we help our clients strategically structure deal pricing, anticipate risks, and protect the real economic value of each transaction. Our approach combines technical rigor, transactional experience, and deep knowledge of international best practices.
