Once this figure is agreed upon and the business sale closes on a particular day (month ends are easiest), the accountants will need a period of time (i.e. a month or two) to determine exactly what the balance sheet was on closing day which we call preparing closing accounts. The working capital figure on this balance sheet is compared to the target working capital figure and any overages are paid back to the Seller and any underages are generally deducted either from any closing payment retention or the Seller’s next deferred payment. Typically on closing day, the amount of excess cash will be estimated and a ‘retention’ (i.e. 10%) will be held back and the balance paid to the Seller with the closing payment. This method is often used when the transaction is simple and the professional accountant’s and advisor's time on a transaction is minimal. This is because there are just two points where analysis needs to happen around the working capital figure and then the preparation of the closing accounts. These can easily be done by the incumbent accountant as discrete projects. Lock Box Method - With this method, an offer on the business is made based on a specific balance sheet, usually the last year-end filed accounts. This then becomes the 'effective date' with the purchaser taking on the risk of the business's performance from that date. The Seller is then contractually obligated not to take resources out of the business (i.e. cash, dividends, equipment) beyond the 'leakage' that has been agreed with the Buyer. They are also under constraints to run the businesses normally on a day-to-day basis and not make any major capital expenditures, commitments for staff, inventory changes, etc. without the consent of the Buyer.
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