How is the final price determined when selling a business: Closing accounts vs. locked box

JUDr. Jakub Dohnal, Ph.D., LL.M.
JUDr. Jakub Dohnal, Ph.D., LL.M.
24.4.2026 | ARROWS law firm

When selling a company, determining the purchase price is not just a matter of agreeing on a number. The legal mechanism by which the parties fix the price and determine how the difference between the estimate and reality will be settled has a fundamental impact on the final proceeds you will receive, the risk you will assume after signing the agreement, and how complex the post-closing settlement will be. 

The illustrative image shows a specialist consulting on the purchase price determination mechanism.

Key takeaways

  • Locked box means a fixed price set on the signing date, with no subsequent adjustment based on performance; the company’s economic risk transfers to the buyer as of the reference financial statements date, not only on the transaction closing date.
  • Closing accounts, by contrast, finalises the price only after closing based on the company’s actual financial position; the buyer may reduce the price by debt, increase it by cash, and adjust it for changes in working capital, which often leads to subsequent disputes.
  • In the Czech Republic and Central Europe, the closing accounts mechanism dominates in approximately 60–70% of transactions, while locked box is more popular in Western Europe (especially the United Kingdom) and in situations where the parties seek legal certainty and speed.
  • The choice of mechanism determines who bears the risk between signing the agreement and its closing, and which party must focus on protecting the company’s value or ensuring accurate calculations.

Basic principles: When and how ownership and economic rights change

To make it clear why the choice of mechanism matters, we need to clarify the characteristics of two key moments in every transaction. Signing is the moment when the parties become legally bound. 

Closing is the moment when ownership is actually transferred, the price is paid, and control over the company is transferred. Between these two moments, which may take weeks or months, there is a period of uncertainty.

It is precisely during this period that what lawyers and investors call the transfer of economic risk takes place—i.e., the moment from which the buyer bears all risks related to the company’s performance. 

Both mechanisms address this issue differently: in a locked box, economic ownership shifts to the buyer as of the reference financial statements date (which usually precedes signing), whereas in closing accounts this moment is postponed until the actual closing date of the transaction.

This seemingly technical distinction has a significant practical impact. If the buyer assumes control over the company already before signing (from an economic perspective in a locked box), all money generated by the company between that date and the actual closing of the transaction belongs to the buyer. 

The seller is therefore motivated to avoid value being extracted from the company, for example through unusual withdrawals, dividends, or purchases outside the ordinary course of business.

Locked box mechanism: A fixed price with protection against value leakage

What is a locked box and how does it work

The locked box mechanism is essentially a fixed-price model that the parties agree already at signing and that does not change thereafter regardless of what happens to the company between signing and closing. When setting up a locked box and the related contractual protections, transaction advisory services within company sales and transaction advisory can help. 

The price is based on the company’s financial statements as of a certain date in the past—in English this is referred to as the locked box date or reference date. This date is usually the end of the previous year or the end of a recent accounting period.

In practice, it works like this: the parties agree that the company is worth CZK 50 million as of 30 June 2025 according to the financial statements as of that date. On the signing date (which may be, for example, one month later, 30 July), this price is fixed in the agreement. The buyer then pays exactly CZK 50 million. To ensure that the buyer has no reason to challenge the price later when reviewing the accounting and legal documentation, it is useful to know the typical triggers for value adjustments described in the article How to prevent the buyer from reducing your company’s price during due diligence: What affects value from a legal perspective.

If the company performs very well between 30 June and 30 September and profit increases, the buyer takes the entire profit—the seller is not owed anything additional. If, on the other hand, the company makes a loss during that period, the buyer also bears that risk.

The entire purchase price is typically payable on the closing date. If the parties subsequently end up in a dispute over the interpretation of the pricing mechanism or what should be reflected in the price, this typically falls under commercial and litigation disputes. The seller therefore has no entitlement to an additional payment or price adjustment based on post-signing results, which differs from the closing accounts mechanism.

Seller protection: Leakage and permitted leakage

Because economic risk transfers to the buyer already as of the locked box date, the buyer must be protected against the seller (or persons controlled by the seller) extracting cash or assets from the company during the interim period. Lawyers refer to this as unauthorised value leakage—i.e., unpermitted leakage.

Therefore, agreements with a locked box mechanism always include a no-leakage clause, which is essentially an instruction to the seller: operate the company in the ordinary course during the interim period; do not pay yourself bonuses; do not pay dividends without the buyer’s consent; do not pay yourself unrealistic remuneration; do not dispose of assets outside the ordinary course of business.

This is precisely why locked box agreements always include a list of permitted leakages, so-called permitted leakage. Even before signing, it is worth preparing the company so that the permitted leakage list reflects reality and does not create room for later claims, as summarised in the article How to prepare a company for sale: Legal and tax issues that most often derail the entire transaction. These are ordinary events that no one considers to be value leakage.

 Typically, this includes:

  • payment of employees’ regular wages,
  • payment of ordinary operating costs (rent, utilities, suppliers),
  • payment of ordinary taxes and mandatory contributions,
  • agreed dividends, if agreed,
  • payment of agreed transaction costs (lawyers, advisers).

What is usually not permitted: repayment of shareholder loans, newly paying extraordinary bonuses, purchases of luxury assets, investments outside ordinary course, payment of unjustified fees or expenses unrelated to ordinary business activities.

If, after the locked box date, it is discovered that the seller (or its related parties) extracted an unauthorised CZK 1 million from the company, the buyer is entitled to deduct that amount from the purchase price – or claim it directly against the seller with interest and, where applicable, penalties. 

The attorneys at ARROWS, a Prague-based law firm, therefore carefully prepare a list of permitted and prohibited actions to avoid any unnecessary disputes later on.

Ticking fee and value accrual

In some cases, the parties agree that the seller deserves certain compensation for managing the company for the buyer during the interim period while nothing flows to the seller from the company. This contribution is called a ticking fee or value accrual.

It may be a fixed percentage of the price for each month of delay (for example, 0.5% of the purchase price per month), or a certain share of the profit the company achieves during the interim period. This compensates the seller for the fact that it is the seller who bears the costs of operating the company, while the buyer takes the profit.

A ticking fee is not mandatory and is often not proposed at all – especially if the interim period is short (e.g., 4–8 weeks). However, if completion of the transaction is delayed for regulatory or other reasons by 6–12 months, it is beneficial for the seller to request something like this.

Advantages of the locked box

The locked box brings significant advantages to both parties:

For the seller: The price is clearly determined already on the signing date, without uncertainty. The seller knows exactly how much money they will receive and when. They do not have to worry that, after completion of the transaction, the buyer will claim that working capital was lower than expected and reduce the purchase price. 

At the same time, the seller can prepare for the receipt of funds and plan their next steps or investments. They receive the full price on the completion date, without disputes and calculations that, with closing accounts, often take months.

For the buyer: The buyer also knows exactly how much they will pay. They do not have to worry that, after completion of the transaction, lengthy disputes will arise when preparing the closing accounts. 

The closing accounts mechanism often leads to long and costly disputes – the buyer prepares the calculation, the seller challenges it, both engage their auditors, who are paid to explain it, and sometimes the matter drags on for months. 

With a locked box, this is avoided. This is particularly useful when the interim period is very short and both parties want minimal administration.

The attorneys at ARROWS, a Prague-based law firm, typically recommend a locked box if the company is financially sound, the interim period is not too long (2–3 months are considered optimal) and both parties trust each other, or at least value legal certainty more than complex calculations.

Disadvantages of the locked box

However, the locked box also has risks:

For the seller: If the interim period is long and the company performs better during that period than expected, the seller does not share in that higher profit. The buyer takes all the benefit. 

This is particularly an issue if the seller remains in the company for some time after completion – they may then feel frustrated that all new profit goes to the buyer.

For the buyer: If the company makes a loss during the interim period, the buyer bears this risk alone. If something unexpected happens (loss of a major customer, a legal dispute, a regulatory fine), the buyer is exposed to that risk. 

The buyer must therefore carefully monitor that the company is not manipulated during the interim period – that key employees are not removed, clients are not lost, and key contracts or assets are not sold.

Closing accounts mechanism: The price is determined only at the end

What are closing accounts and how are they calculated

The closing accounts mechanism is a traditional approach and is widely used in the Czech Republic. Unlike the locked box, the price is calculated only on the completion date based on the company’s actual position. The parties agree in advance on the formulas and rules for how the price will be calculated, but the final figure is determined only once the relevant data are available.

In practice, it works like this: the parties agree on an indicative price based on previous financial statements and estimates. For example, it may be said that the company is worth approximately CZK 50 million, but on the condition that, as at the completion date, it will have working capital of CZK 5 million. 

On the completion date, the buyer and the seller (or their auditors) then prepare a closing statement – the accounts as at the completion date. They determine the actual working capital, the actual debt, and the actual cash. The price is then adjusted accordingly.

Typically, the price is adjusted as follows:

  • Initial indicative price: CZK 50 million
  • Adjustments:
  • Final price: 50 − 2 + 1 − 1 = CZK 48 million

The seller therefore repays CZK 2 million, or alternatively receives only CZK 48 million instead of the promised CZK 50 million. If working capital were higher, the buyer would, conversely, pay the seller an additional amount.

This usually happens in such a way that the buyer prepares the closing statement and sends it to the seller. The seller is then given time to review it – typically 30–60 days – to point out errors. If the parties agree, the matter is resolved.

If they do not agree, it goes to an independent expert (usually an auditor or tax adviser), who takes all the documents and decides finally and bindingly.

Working capital: A key element of closing accounts

The most common source of disputes in closing accounts is working capital (net working capital, NWC). Working capital is essentially the amount the company needs for day-to-day operations – money to purchase goods, pay wages, buy raw materials, pay rent. When you sell a company, you want it to have sufficient working capital so that it can operate smoothly after the sale and the buyer does not have to inject additional capital.

Working capital is calculated simply: current assets minus current liabilities. Current assets include items such as inventory, receivables from customers, and cash in the bank. Current liabilities include items such as payables to suppliers, due invoices, and short-term loans.

The problem is that what exactly is included in working capital is often unclear. Are fixed insurance bonuses for employees included? Is debt that is being settled included? Is inventory included that you could in fact “clean up” before closing?

The attorneys at ARROWS, a Prague-based law firm, therefore consistently prepare the part of the agreement called the accounting schedule – a list of principles for how all these items are calculated. This is not automatic, and without a clear definition, significant errors may occur.

Advantages of closing accounts

Closing accounts has many advantages:

For the buyer: No surprises. They see exactly what condition the company is in on the closing date. They are not in a situation where they assumed working capital would be CZK 5 million, paid a price reflecting that, and then found out it was only CZK 3 million – and had to accept it. Closing accounts is fairer – the price adjusts to reality.

For the seller in certain situations: If the business is highly volatile (e.g., e-commerce with very seasonal operations, where large volumes of inventory are purchased in January and then sold and monetised), closing accounts is fairer. The seller has no control over what the position is on a specific day, so it would not be fair to fix the price too far back in time.

In the Czech Republic and Central Europe, closing accounts is a common standard – it is used in approximately 60–70% of transactions.

Disadvantages of closing accounts

However, closing accounts leads to many issues:

Lengthy post-closing disputes: Buyers and sellers often disagree on how the closing statement should be calculated. What is working capital and what is not? Was that inventory in good order? All of this results in the seller receiving the money only during or at the end of the dispute, which can take months.

Information asymmetry: After closing, the buyer has access to all the company’s books and can review everything carefully. The seller only learns about it when the buyer sends the closing statement – which may be a month or two after closing. The seller then has only limited time to gather evidence.

Manipulation:Without careful rules, things end up being calculated arbitrarily. In a dispute, the seller might claim the inventory was of higher quality, while the buyer would claim the opposite. Without clear rules, this leads to arguments.

Most common questions on purchase price determination

1. What happens if the parties cannot agree on the closing accounts?

Typically, a negotiation period is provided – say 20 days. If they do not reach agreement within that time, the matter goes to an independent expert (an auditor or tax adviser), who reviews all documents, both positions, and makes a final decision. This decision is usually binding and must be accepted by both parties.

2. How long does a closing accounts dispute last?

In the best case, 2–3 months if the parties reach agreement quickly. If it has to go to an expert, it may take 4–6 months. Significantly complex cases may take longer. The seller therefore waits that long for the money, which can be problematic.

3. Does it make sense to ask for a locked box if the buyer insists on closing accounts?

It depends on the situation. If the interim period is very short (e.g., only 4 weeks) and the company is very stable, it can be negotiated. However, if the interim period is long or the company is in turbulence, the buyer would not accept a locked box.

Other important price adjustment mechanisms: Earn-out

In addition to locked box and closing accounts, there is also a very popular mechanism called an earn-out. This is a situation where the full price is not paid at closing, but part is paid later depending on how the company performs after the sale.

Typically, the buyer pays around 60% of the price at closing, and the remaining 40% only after a year, if the company performs well and meets certain targets (e.g., a certain profit or revenue). 

This is very useful in situations where the buyer and seller cannot agree on valuation. The buyer says, “trust me, once I take over the company, it will be worth more in a year,” while the seller says, “I have a different forecast.” An earn-out is a compromise: “We will see how it develops, and then share in the upside.”

However, an earn-out brings its own risks and disputes – for example, the buyer may change how the company is managed and thereby reduce profit, so the earn-out does not pay out. The attorneys at ARROWS advokátní kancelář therefore prepare clear definitions of how the earn-out is calculated and how disagreements are handled.

Working capital and its role in closing accounts and the locked box

As we said, working capital is a key concept. In a locked box, working capital is fixed as of the locked box date – and then it is no longer discussed. In closing accounts, it is recalculated on the closing date.

A typical working capital adjustment in closing accounts looks like this: the parties agree on a target working capital – the level of working capital the company should have as of the closing date. This is usually a historical average figure calculated from recent years. For example, it may be CZK 5 million.

If, on the closing date, working capital is only CZK 4 million, the buyer pays the seller CZK 1 million less. If it is CZK 6 million, the buyer pays CZK 1 million more. This compensates for fluctuations in what is included in current assets.

The problem is that what is included in working capital is often inconsistent. That is why serious agreements always include a detailed schedule specifying what is included and what is not. Without it, the parties could end up arguing about whether a particular receivable is included, complicating everything.

Timeline and practical steps: From signing to closing

Deadlines and expected feedback

A lot happens between signing the agreement and closing. Typically, it takes 2–6 months, sometimes longer. During this period, the following must occur:

  • regulatory approvals must be obtained (if approval is required  or from the financial regulator),
  • third-party consents must be obtained (e.g., the landlord’s consent to an assignment of the lease),
  • “conditions precedent” must be satisfied – i.e., matters that must be fulfilled for the transaction to close, such as that no Material Adverse Change (MAC) has occurred.

In the Czech Republic, for example, parties often wait for approval from the Office for the Protection of Competition (ÚOHS) if the deal is larger.

Our attorneys in Prague at ARROWS advokátní kancelář routinely prepare a timeline so it is clear what must happen when and who is responsible for what.

Preparation for closing

If closing accounts applies, then in the final weeks before closing the closing statement starts to be prepared. The buyer (or its auditor) takes all the company’s books and statements and calculates all components to be adjusted – working capital, debt, cash, etc.

If a locked box applies, then at closing it is only verified that no unauthorised leakage has occurred. Otherwise, nothing is calculated because the price is already fixed.

Most common mistakes and disputes in price determination

Mistakes in preparing a locked box

Poorly chosen locked box date: If the locked box date is too far in the past (e.g., financial statements from a year ago), the risk increases that something will change and the buyer feels more exposed. Conversely, if it is too close to signing, the seller does not have sufficient time for review. Typically, it is set 2–3 months before signing.

Unclear list of permitted leakage: If it is not clearly agreed what is and is not permitted, it may later turn out that unpermitted leakage was calculated for the seller that the seller did not intend to make. Then there is a dispute.

No monitoring: No document enabling the buyer to check whether leakage is occurring. It is then only discovered after closing.

Mistakes in preparing closing accounts

Vague definition of working capital: Without a clear schedule, the parties will not agree on what is included and what is not. Then a dispute arises.

Excessively long deadline for preparing the closing statement: If the buyer is given, for example, 120 days to prepare the closing statement, the seller waits for months without the money. 60–90 days is better.

Lack of clear objectivity: If it is not agreed how items are calculated, it becomes subjective. That leads to disputes.

When preparing closing accounts, the attorneys at ARROWS, a Prague-based law firm, carefully define accounting policies, review the company’s historical practices, and propose objective formulas.

Potential issues

How ARROWS helps (office@arws.cz)

Unclear definitions in a locked box – the seller is later charged unpermitted leakage that they did not intend.

The attorneys at ARROWS, a Prague-based law firm, carefully define the list of permitted and prohibited actions, set up monitoring, and communicate with the buyer to avoid misunderstandings.

Working capital disputes in closing accounts – the parties disagree on what is included, how it is calculated, and the entire process drags on for months.

ARROWS, a Prague-based law firm, prepares a detailed accounting schedule with calculation examples, historical data, and objective rules. At the same time, it represents you in negotiations with the independent expert.

A long deadline for the closing statement, during which the seller waits for the money.

ARROWS, a Prague-based law firm, negotiates reasonable deadlines (typically 60–90 days) and ensures the buyer has an incentive to move quickly.

Uncertainty over who has the right to order adjustments, and whether the calculations are correct.

ARROWS, a Prague-based law firm, ensures the agreement clearly sets out the procedure: who prepares the statement, who it is sent to, the deadline for objections, how disputes are resolved (usually via an expert), and the legal consequences.

The risk that hidden liabilities or issues will emerge after closing, reducing the company’s true value.

ARROWS, a Prague-based law firm, conducts thorough pre-transaction due diligence, ensures proper warranties and indemnities in the share purchase agreement, and can arrange representations and warranties insurance (W&I).

When to choose a locked box and when to choose closing accounts

The choice between a locked box and closing accounts should reflect the specific situation and the parties’ interests. Here are practical guidelines:

A locked box is suitable when:

  • The interim period is short – typically 2–6 weeks (maximum 3–4 months).
  • The company is financially stable and without significant fluctuations.
  • Both parties want to minimize administration and post-closing disputes.
  • The seller cares about a quick and certain fixation of the purchase price.
  • Volatility is low – e.g., B2B services with stable clients, manufacturing companies with long-term contracts.
  • The seller cares about immediately locking in the financial value.

Closing accounts are suitable when:

  • The interim period is long – typically 4+ months.
  • The company has significant seasonality or volatility in working capital (e-commerce, trading businesses).
  • The buyer wants certainty that it will acquire the company with the agreed minimum working capital.
  • Both parties value the price being adjusted to reflect reality.
  • The seller does not mind waiting some time for the final calculation.

In the Czech Republic, closing accounts are generally used more due to market practice and tradition. However, the locked box mechanism is gaining traction, especially in transactions financed by private equity funds, which value certainty and speed.

Other important elements of the agreement: representations, warranties, and indemnities

In addition to the price determination mechanism, every share purchase agreement also includes representations and warranties – i.e., the seller’s assurances that certain matters are true and that nothing hidden is going on.

The seller is typically asked to warrant that:

  • The company is duly incorporated and in good legal standing.
  • All contracts with key partners are in order.
  • There are no hidden legal disputes.
  • There are no tax arrears.
  • All employees have proper employment contracts.
  • Legal ownership of intellectual property is in order.

If it is later found that any of this was not true, the buyer is entitled to an indemnity – i.e., financial compensation from the seller. To make it easier for the seller, part of the purchase price is commonly held in escrow – in an account with a third party (e.g., a law firm) – typically for 12–24 months. 

If a claim arises (e.g., a tax debt), the buyer will take the money from the escrow. This means the funds remain available, but are not fully paid out to the seller immediately.

Representations and warranties are prepared carefully – they are a significant source of disputes. The attorneys at ARROWS, a Prague-based law firm, have extensive experience with this and know what to watch out for. They can also arrange representations and warranties insurance (W&I insurance), which covers certain risks.

Most common questions on dispute resolution

1. How is a dispute over closing accounts resolved – does it go to court?

Usually not. Most often, it is resolved through an independent expert (an auditor or tax advisor), who considers both positions, reviews the facts, and makes a final decision. In practice, this is much faster and cheaper than court proceedings. The share purchase agreement always specifies this clearly – what the expert should do, the deadline, and how fees are paid.

2. What happens if the expert decides the buyer was right?

Then the seller pays the buyer the difference. If it relates to the escrow, the buyer takes the money from the escrow. If it relates to additional payment, the seller is recorded as owing a debt. It is usually handled by reducing the seller’s compensation or requiring a direct payment from the seller.

3. Do I need to hire a lawyer to represent me in a dispute with the expert?

It is not mandatory, but it is strongly recommended. The expert will take some time to review the agreement, the documents, and both parties’ arguments. Without a lawyer, you will not be 100% sure that you have interpreted the agreement correctly and presented your position properly.

Final summary

The choice between a locked box and closing accounts is one of the key decisions when selling a company. A locked box gives you certainty and speed – the price is locked in, you receive the money on the closing date, with no subsequent disputes. But you must carefully ensure that the company is not manipulated during the interim period. 

Closing accounts are fairer when working capital or other items change during the interim period, but they lead to lengthy calculations and often to disputes.

Regardless of which mechanism you choose, three things are essential:

  • Carefully prepare a list of definitions – what is included, what is excluded, how working capital is calculated, what constitutes permitted leakage, etc. Without this, there will be problems.
  • Agree on clear dispute-resolution procedures – who the expert is, what the deadline is, and how it will be handled. It is not good to leave this until the last moment.
  • Both parties should understand what they have agreed. If anything is unclear to the seller, they should ask their attorney – not later, when the money is already on the table. Attorneys from 

If you are unsure how to proceed, or if you are in a complex situation involving a larger transaction, it is safest to contact the attorneys at ARROWS, a Prague-based law firm, at office@arws.cz. They can help you with drafting the agreement, negotiating with the buyer, and ensuring the transaction is smooth and efficient.

Most common questions on price determination and transaction closing mechanisms

1. What is the typical period between signing and closing the transaction?

Usually 2–6 months. In straightforward cases with good documentation and no regulatory obstacles, 4–8 weeks. In complex transactions requiring regulatory approval, or where the sale is run as an auction, it can be 6–12 months. 

2. If I choose a locked box and the interim period is longer, how can this be managed?

For a fixed price with a longer interim period, this is typically supplemented by a “ticking fee” – the seller receives an additional percentage of the price for each month of waiting. Alternatively, a later locked box date is chosen to reduce the seller’s risk. The attorneys at ARROWS, a Prague-based law firm, regularly negotiate such compromises.

3. If I am selling a company and would like to remain in a management position for another year, how will this be reflected in the price determination mechanism?

This is an important issue addressed through an earn-out mechanism. If, as a manager, you will need to achieve certain targets for the company to develop, this can be formalised in an earn-out clause. You will receive part of the price only after a year, provided the agreed targets are met. This motivates the buyer to retain you and gives you an opportunity to share in the upside.

4. If there is a dispute over working capital in the closing accounts, how long does it take?

Usually 2–4 months for negotiations and 2–3 months via an expert if it goes to expert determination. Overall, therefore, 4–7 months. In complicated cases, even longer.

5. What is my risk if I set the locked box date incorrectly and major issues are discovered later?

In a locked box, the seller’s risk regarding the company’s future performance decreases at the moment the price is fixed. If a hidden risk related to the period after the locked box date then emerges, it is borne by the buyer. However, the seller still remains liable for representations and warranties – i.e., for assurances that things are in order as of the signing date.

Notice: The information contained in this article is of a general informational nature only and is intended for basic guidance on the topic. Although we strive for maximum accuracy, legal regulations and their interpretation evolve over time. To verify the current wording of the regulations and their application to your specific situation, it is therefore necessary to contact ARROWS, a Prague-based law firm, directly (office@arws.cz). We accept no liability for any damages or complications arising from the independent use of the information in this article without our prior individual legal consultation and professional assessment. Each case requires a tailored solution, so please do not hesitate to contact us.

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