Selling a company? The difference between effective date versus closing date, and locked box mechanism versus closing accounts mechanism

When selling a company, various constructions are possible, both from an economic and legal standpoint. The sale we are talking about in this blog is a sale of shares, and not an asset/liability transaction.

Share transfer on the closing date

Legally, the transfer is simple. It takes place on the day you visit the public notary and transfer the shares to the buyer. This is referred to as the closing date. This date should not be confused with the signing date, the date on which the purchase agreement is signed. That date is usually before the closing date, although the signing and the closing dates can also be the same day.

Buying a company with retroactive effect

In the economic sense, the transfer may take place on the closing date, but may also be before the closing date. In practice, we often see a buyer purchasing a company with retroactive effect. The retroactive date is the effective (economic) transfer date. This is usually at the end of a financial year, when the books are closed, because the transfer is easiest to settle at this point.

The advantage for the buyer is that the risk is limited by an effective date in the past. The seller can no longer take any action with retroactive effect, which reduces the buyer’s risk of being blindsided. It is essential to know that if the effective date is in the past, and from that date onwards, the profit goes to the buyer if a locked box mechanism was agreed.

Profit and expenses settlement at effective transfer date

As of the effective date, the buyer and seller settle. This means that as a selling shareholder, you must repay any profits made over the current financial year or offset them against the purchase price. This also applies to special costs, including the costs of your advisers involved in the sale. This is something that must be taken into account in the sales process and factored into the price.

Interest compensation on the purchase price under locked box

As a seller, you would do well to charge the buyer an interest compensation on the purchase price, where the effective date is not the same as the closing date and lies in the past. Read more about the locked box mechanism in this blog.

Settling profits on the date of transfer

You often see the closing accounts mechanism used where the effective date and the closing date are the same day. The closing accounts mechanism means that profits are settled as of the business’s date of transfer. This is usually based on an estimate, and a final settlement takes place sometime after the transfer. This can sometimes lead to conflict.

Blenheim has a strong preference for an economic date at the end of a financial year using the locked box mechanism. This gives parties the security of knowing where they stand and causes the least hassle.

Legal support when selling your business

Has someone shown interest in your business? Always contact an acquisition lawyer before you sign anything! By seeking advice in advance, you will know for sure which choice is best for you and your business. Blenheim’s acquisition team is here to help.