Lesson 8 of 8 in the Startup Mastery series
You have built NovaTech from an idea in a co-working space to a £50M ARR platform serving 340 enterprise customers. A PE firm has offered £500M. The champagne is on ice. But between a signed term sheet and money in the bank lies the most complex, high-stakes process most founders will ever navigate — and the details matter enormously.
This final lesson walks through how M&A transactions actually close: the legal mechanics, the financial waterfalls, the tax implications, and the question every founder eventually faces — what comes next.
The term sheet is not the finish line — it is the starting gun. Between signing and completion, more value is negotiated, contested, and sometimes lost than at any other point in the transaction. Understanding the mechanics protects your interests and your wealth.
The Share Purchase Agreement
The Share Purchase Agreement (SPA) is the definitive legal document that governs the sale. It runs to hundreds of pages and covers everything from the purchase price and payment terms to the warranties the sellers provide, the indemnities they give, and the conditions that must be satisfied before the deal completes.
Founders often treat the SPA as a legal formality — something the lawyers handle while they focus on the business. This is a mistake. The SPA contains provisions that can cost or save millions, and every clause is negotiable.
Key SPA Provisions Every Founder Must Understand
| Provision | What It Does | Why It Matters |
|---|---|---|
| Purchase price mechanism | Defines how the final price is calculated | Locked box vs completion accounts (see below) |
| Warranties | Seller statements about the business | Breaches trigger claims against you |
| Indemnities | Specific risk allocations | More exposure than warranties — uncapped or high-cap |
| Restrictive covenants | Non-compete and non-solicit | Limits your activity for 2–3 years post-exit |
| Conditions precedent | What must happen before completion | Regulatory approvals, key customer consents |
| Escrow / retention | Money held back post-completion | Covers warranty claims (typically 10–15%) |
Never sign a management warranty deed without understanding personal liability. In most PE transactions, founders and senior management are asked to provide individual warranties about the business. These are personal obligations — a warranty breach can result in a claim against you personally, not just against the company. Ensure your SPA includes warranty insurance (W&I insurance) or negotiate appropriate caps and limitations.
Completion Accounts vs Locked Box
The purchase price mechanism is one of the most consequential decisions in any M&A transaction. There are two primary approaches, and they allocate risk very differently between buyer and seller.
Completion Accounts
- Price adjusted post-completion based on actual balance sheet
- Working capital, debt, and cash measured at completion date
- Buyer prepares completion accounts (typically within 60–90 days)
- Seller can dispute — independent accountant resolves
- Final price not known until weeks after completion
- Favours buyers — they control the post-completion accounting
Locked Box
- Price fixed at signing based on a reference balance sheet date
- No post-completion adjustment — price certainty at signing
- Seller earns interest ("ticker") from locked box date to completion
- "Permitted leakage" defines what cash can leave the business
- Any "non-permitted leakage" is indemnified pound-for-pound
- Favours sellers — price locked, no post-completion surprises
In European M&A, locked box has become the dominant mechanism — over 70% of European PE deals now use it. The seller benefits from price certainty: once the SPA is signed, the purchase price does not change (absent fraud or leakage). The buyer's risk is that the business deteriorates between the locked box date and completion, but they mitigate this through the "ordinary course" covenant — a contractual obligation for the seller to run the business normally during the interim period.
NovaTech's locked box date is set at 31 December 2027, with completion expected on 28 February 2028. The reference balance sheet shows net cash of £8M and working capital of £6M above the agreed target. The PE buyer offers a ticker of 5% per annum on the equity value, compensating Sarah and the shareholders for the two-month delay — adding approximately £4.2M to the total consideration.
Continue reading — free
Sign up in seconds to unlock all lessons, quizzes, and your personalised learning dashboard. No credit card required.
Already have an account? Log in
By continuing you agree to our Terms and Privacy Policy.