Key takeaways
- The headline price agreed at signing is not the cash you receive at closing.
- Value leaks in four places: the working capital target, the pricing mechanism, debt-like items and late concessions made under deal fatigue.
- Most of the loss is decided in the definitions of the letter of intent and the share purchase agreement, not in the headline number.
- Sellers protect value by agreeing those definitions early and modelling net proceeds, not enterprise value.
Many business owners and executives assume that once a price is agreed during a sale process, the deal is essentially done. The reality is often different.
In M&A (mergers and acquisitions) transactions, a meaningful share of the value a seller expected can erode between the letter of intent and closing. The loss rarely comes from a decline in the business’s performance. It comes from the deal structure, the contractual definitions and the financial mechanisms that decide how the headline price turns into cash.
As a result, the gap between the “agreed price” and the “cash in the bank” can be far wider than the seller expected.
Where and How Is Value Lost?
In M&A, value leakage is rarely obvious. It happens quietly, inside the technical details. These are the five places where we see it most often.
1. Working capital traps
Buyers expect to receive a business with a “normal” level of working capital: receivables, inventory and payables at the level the business needs to run. The agreed level is often called the target or the peg. If the actual working capital at closing is below the target, the price falls by the shortfall.
When the target is set artificially high, for example on a single strong month or without adjusting for seasonality, the seller has to leave more cash in the business than planned. The headline price looks unchanged, but the net amount the seller receives goes down.
2. The pricing mechanism: locked box vs. completion accounts
How the price is set matters as much as the price itself.
- In the locked box model, the price is fixed on a historical balance sheet (the locked box date). Value created after that date belongs to the buyer, and the seller undertakes not to take value out of the company, apart from agreed “permitted leakage” such as ordinary salaries. To be paid for the profits earned after the locked box date, sellers often negotiate a “ticker”: a daily amount added to the price until closing.
- In the completion accounts model, the price is recalculated after closing, based on the actual net debt and working capital on the completion date.
Both approaches have advantages and risks. A locked box gives the seller certainty, but a loosely drafted leakage clause can turn routine payments into price deductions. Completion accounts follow the business more closely, but vague accounting definitions invite a post-closing dispute that the buyer, who now controls the books, is better placed to win.
3. “Debt-like” items
During due diligence, buyers reclassify certain items as debt and deduct them from the company’s value:
- Deferred expenses and accrued costs
- Management bonuses earned but not yet paid
- Tax liabilities and open tax exposures
- Provisions, customer prepayments and overdue payables
None of these appear as bank debt, so sellers often discover their size only late in the process, when there is little time left to challenge them.
4. Escrows, holdbacks and earn-outs
Not all of the price is paid on closing day. Buyers often hold back part of it in an escrow account against warranty claims, or make part of it depend on future results through an earn-out.
An escrow is reasonable in principle. The risk lies in its size, its duration and the conditions for release. An earn-out carries a different risk: after closing, the buyer controls the accounting, the costs and the strategy that determine whether the target is met. If the agreement does not fix how EBITDA or revenue will be measured, the seller is betting part of the price on decisions it no longer makes. Warranty and indemnity (W&I) insurance can reduce or replace the escrow in some deals.
5. Negotiation pressure and deal fatigue
The longer a process drags on, the more tired both sides become. Everyone wants to close, and momentum turns into pressure. At this stage sellers may:
- Approve clauses that look minor but carry significant financial impact
- Make concessions whose effect on net proceeds has not been calculated
- Decide in a “let’s just get it done” mindset
Changes that look small on paper can add up to a serious loss of total value.
| Leakage point | How value is lost | How the seller protects it |
|---|---|---|
| Working capital target | The buyer sets a “normal” level above the business’s real average, so the seller leaves extra cash behind at closing | Base the target on a 12–24 month monthly average, adjusted for seasonality, and agree it in the letter of intent |
| Pricing mechanism | A locked box without clear leakage rules, or completion accounts with loose definitions, moves value to the buyer | Choose the mechanism that fits the business and define permitted leakage or the completion adjustments precisely |
| Debt-like items | Deferred costs, unpaid bonuses, tax exposures and provisions are deducted from equity value like debt | Agree the list of debt-like items and the net debt definition before the buyer starts due diligence |
| Escrows, holdbacks and earn-outs | Part of the price is paid later, or only if targets are met, under definitions the buyer controls after closing | Limit the amount and duration, tie release to objective conditions and fix the earn-out accounting rules in the agreement |
| Deal fatigue | Late-stage concessions are accepted without their financial effect being modelled | Keep a live net-proceeds model and test every change against it until signing |
A worked example: from headline price to cash in the bank
The figures below are illustrative, but the structure is typical of the deals we see. The seller agrees a headline enterprise value of EUR 100 million in the letter of intent.
| Step (illustrative, EUR million) | Amount |
|---|---|
| Headline enterprise value agreed in the letter of intent | 100.0 |
| Less: net financial debt | −15.0 |
| Less: debt-like items (unpaid bonuses, tax provision, customer prepayments) | −6.0 |
| Less: working capital shortfall against the agreed target | −4.0 |
| Equity value at closing | 75.0 |
| Less: escrow held back for 18 months against warranty claims | −7.5 |
| Cash received at closing | 67.5 |
The seller who anchored on 100 receives 67.5 on closing day. Net debt was known from the start; the debt-like items, the working capital target and the escrow terms were all negotiated in the share purchase agreement. The remaining 7.5 arrives only if no warranty claim is made within 18 months. Every line between 100 and 67.5 was open to negotiation, and each one needed a clear definition early in the process.
The truth: valuation is only the beginning
A company’s valuation is only the first step. The real outcome depends on:
- How the deal structure is designed
- How the contractual clauses are drafted
- How clearly the financial definitions are set
- How disciplined the negotiations are
- How well the process is managed through to closing
What matters is not the “agreed price” but the “net cash realised”.
How Anatrica Partners protects value in this process
At Anatrica Partners, we focus on protecting value at every stage of the transaction:
- Designing the deal structure correctly
- Defining net debt, debt-like items and the working capital target early
- Choosing and drafting the pricing mechanism
- Negotiating escrow, holdback and earn-out terms
- Monitoring closing adjustments until the final payment
Our goal is simple: to close the gap between the price you agreed and the cash you receive. Preparation starts before the buyer arrives; our article on reverse due diligence explains how, and our sell-side advisory page describes how we run the full process.
Frequently asked questions
What is value leakage in M&A?
Value leakage is the gap between the headline price agreed at signing and the net cash the seller actually receives at closing. It comes from working capital adjustments, debt-like deductions, the pricing mechanism and concessions made late in the process.
What is the difference between locked box and completion accounts?
In a locked box deal the price is fixed on a historical balance sheet and the buyer is protected by a ban on value leaving the company after that date, except for agreed “permitted leakage”. With completion accounts the price is adjusted after closing to the actual net debt and working capital on the completion date.
What are debt-like items?
Debt-like items are obligations that do not appear as bank debt but that a buyer deducts from enterprise value in the same way. Typical examples are deferred taxes, unpaid bonuses, provisions, customer prepayments and overdue payables.
How can a seller reduce value leakage?
Define net debt, debt-like items and the working capital target in the letter of intent, before exclusivity weakens your position. Preparing the company in advance through reverse due diligence and working with an experienced sell-side adviser also narrows the room for price adjustments.
Final word
Entering a sale process focused on valuation alone is not enough. The critical question is how much of that value you will actually realise.
If you are considering a sale, understanding in advance where value can leak, and preparing for it, directly shapes the outcome. A well-structured and well-managed process can make a difference of millions of euros.
