Buying or selling a business jargon busting

Take five guide - Buying or selling a business – a jargon busting Guide

Buying or selling a business can be an emotional, time-consuming and sometimes confusing process, with many key terms to get to grips with. Here’s our guide to some of the terms you’ll come across.



The date on which the transaction concludes.    

Completion accounts

Accounts prepared post-completion which are used to confirm if the value of the company at the point of completion. The purchase price is adjusted up or down to align with the completion accounts.

Completion accounts typically measure net asset value of a company or the “cash free debt free” value.   


the purchase price paid by the buyer to the seller for the business.   

Deferred Consideration

A fixed amount payable by the buyer to the seller for the shares in the company, payable on a fixed date after Completion.  


To the extent a warranty proves to be inaccurate, the seller will need to disclose against it to ensure it has maximum protection under the SPA. This is documented in a disclosure letter.   

Disclosure Letter

As noted above, this letter gives the seller the chance to formally disclose circumstances to the buyer which may cause warranties to be untrue.  

 Due Diligence

This is the investigatory process of the transaction, under which the buyer asks various questions about the condition of the business. Common topics are corporate structure, accounting, contracts, operations, employees, insurance and property. The seller’s responses to these questions feed into the warranty section of the SPA.   


Earn-outs typically consist of contingent, additional payment(s) that can be made after Completion depending on future financial performance, and expire at a specified date.   


an arrangement whereby a third party temporarily holds some of the purchase price subject to a certain situation or event either taking place or not taking place. For example some monies could be held in escrow if there was some litigation ongoing in the company that could be damaging post-completion. 

The escrow monies would be held securely and used in the event the company owed money as a result of that litigation. If the litigation was favourable to the company the seller would receive the escrow monies.   


The date the SPA is signed. Ordinarily completion will take place simultaneously – but in some cases there will be a gap during which certain conditions need to be satisfied.   

Locked Box Accounts

A locked box mechanism is an alternative pricing mechanism to completion accounts. The main objective of the “locked box” mechanism to provide certainty on the cash consideration at the point at which the SPA is signed.

Under the locked box mechanism, the purchase price is established by the parties by reference to a set of agreed historic accounts or a historic balance sheet (this may be the last set of audited financial statements, but sometimes a set of accounts prepared specifically for the purpose).

These are referred to as the “locked box accounts”. These accounts fix the equity price in respect of the cash, debt and working capital actually present at the date of the locked box accounts.  

Material Adverse Effect

a term used as a materiality threshold to measure the negative effect of some event on the target business.                               

SPA – Share Purchase Agreement

This is the principle document to document a sale of shares. This document details all the key terms of the transaction – who is selling, who is buying, how many shares, their value, and any conditions or obligations attached to the sale. 


Contractual statements of truth as to the state of the company to be given at Completion. To the extent a warranty is untrue, a buyer will have a claim equal to the reduction in value of the shares they have purchased arising due to that breach.   

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