Completion Mechanisms, Working Capital and Earn-Outs — What the Price on the Signature Page Actually Means
Julian R. Sterling
These are the companion files of Closing the Deal by Julian R. Sterling.The book on Amazon →
The five Excel workbooks that go with the book, the first four corrected where they were wrong. Every figure
the book prints is reproduced in them by a live formula, and each model workbook ends with a checks sheet
setting the printed figure beside the computed one: 69 checks in all, every one green. The fifth
is the eighty questions of Appendix A, with room to answer them. Around them: the same four models with the
inputs emptied, thirteen working documents to print, forty questions that mark themselves, and three cases the
book names and never takes to a number. Nothing is locked, protected or watermarked.
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Thirteen workbooks, the printable documents and the read-me. Each group below can also be
downloaded on its own. Last revised 24 September 2026.
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Chapters 3 to 9 · the reconciliation
The equity bridge, both columns at once
The reconciliation from an agreed enterprise value of €118.0 million to the price
actually paid for the shares, one line per item, with the buyer’s column and the
seller’s column side by side. Twelve debt-like items, six of them genuinely arguable, each
with its own switch: set a switch to zero and the item leaves net debt.
The two defensible bridges are €61.17 million and
€81.87 million — and nobody is arguing about the business. The whole
€20.70 million is a disagreement about definitions in a document, which is why it is
settled by whoever drafted first and read hardest rather than by whoever is right about the
company.
Sheet 3 adds up the five things the drafting moves: €47.76 million, or
40.5 per cent of the enterprise value. They overlap, and no single deal fights
all five to the maximum. The total measures the size of the terrain, not a prediction.
Re-verified: every figure reproduces. The four spreads sheet 3 carries from the other
workbooks are now input cells naming the file and cell they come from, and the checks sheet adds
six identities that hold for any inputs.
Locked box or completion accounts, on identical terms
The same deal both ways, on identical commercial terms, with nothing changed except the
machinery. The difference is €6.56 million in the seller’s favour
— and sheet 2 splits it between its two causes, because they are completely different
in nature.
€11.90 million of it is when the debt-like items were settled.
In a locked box that argument happens before signing, while the seller can still walk away. In
completion accounts it happens after, and the buyer prepares the accounts. That is a difference
in bargaining position, not in accounting, and it is the part of the mechanism nobody puts a
number on.
The rest is where in the seasonal cycle the balance sheet falls, plus the ticker and the
leakage, the parts that do get argued about. Revised: they are not the smaller half of the
difference; they run the other way. The season costs the seller €5.50 million
and the ticker less the leakage returns €0.16 million, so the timing of €11.90 million
is more than the whole €6.56 million.
Twelve months of a seasonal manufacturer swinging from €16.9 to
€23.9 million of working capital, and five defensible definitions of the target. Same
business, same balance sheet, same completion date: €7.00 million of
spread, decided by the choice of a sentence.
Sheet 3 is the one to look at. It runs each peg against every month of the year. The
twelve-month average produces an adjustment of −2.93 in one month and +4.07 in another
— a €7.00 million lottery on the completion date, which is the
strongest argument a seller with a seasonal cycle has for a peg matched to the season.
The only definition on the list that compares like with like is the one nobody proposes.
Revised: the same-month peg compares with month 6, but the book’s locked box puts completion
three months after a month-12 box, in month 3, where the same month a year earlier is
€19.60 million and the adjustment +2.80, not −1.50. The peg now follows a
completion-month cell and the sheet shows both readings.
Thresholds, shapes, and the six accounting choices
Six ordinary post-completion actions, none of them improper, each with a switch: a group
management charge, a change of accounting policy, integration costs, a synergy credit, a new
bonus accrual, deferred capex. Together they move EBITDA by €1.30 million a year and
remove €6.60 million of a €12.00 million earn-out on a
business that performed.
Sheet 3 runs the same performance through three shapes. The business earned €16.90
and €17.40 million against an €18.00 million target — short by 6.1 and
3.3 per cent. Straight-line, that is €6.90 million. Under a cliff it is
nothing at all.
Which is why cliffs get conceded cheaply: they cost nothing in the seller’s own
projection, and everything in the case that actually happens.
Revised: the third shape on sheet 3 repeated the straight-line formula for year 1 only. It is now
what its label says, linear from zero with no threshold, and pays €11.43 million on
the same performance. The shape dropdown this page describes was missing; sheet 3 now has it.
The eighty questions of Appendix A as a checklist you can work in: the same eighty, in
the same order, generated from the same source file as the chapter, so the book and the workbook
cannot drift apart.
Columns for the answer, the source document, the owner and the date. The
status column is computed, and marks any question answered without a source as
“unsourced” — an answer whose authority is the other side is
not an answer. The Progress sheet counts only the sourced ones, in total and by section.
Start with section four. Working capital can be answered from the target’s own
monthly accounts without asking the other side anything, and the answers change what you ask
everywhere else.
Audited and kept as the book has it: the same eighty, ten to a section.
The four model workbooks with their 64 inputs emptied. The checks sheets count what is still missing and test what holds for any inputs.
Chapters 3 to 27
Your bridge, your season, your earn-out
The equity bridge, the two mechanisms, the peg and the earn-out, with the same formulas and every input emptied: the headline, the twelve debt-like items, the cash, the locked box and the completion accounts, twelve months of working capital, the earn-out terms and the six buyer actions. The switches stay at 1 and the shape dropdown on the cliff, because they are choices, not data.
The book’s 64 inputs are listed in a text file inside the archive. Type them back in and the book’s figures come back with them: 61.17 and 81.87 for the two bridges, 6.56 between the mechanisms, 7.00 across the pegs, 6.60 of protections.
Thirteen pages to print and use. A4, with margins wide enough for US Letter.
Chapters 3 to 27 · Appendix A
Thirteen working documents
The two bridges side by side, with Meridian’s figures beside blank columns. The net debt schedule, item by item, in or out of net debt and working capital. The cash statement and what is trapped. Twelve months of working capital. Five definitions of the peg. The completion-date grid. Locked box and completion accounts on identical terms. The locked box file: ticker, longstop and leakage. Completion accounts and the dispute route. The earn-out term sheet, interrogated. The six buyer actions and the clause that neutralises each. The rest of the consideration. The price memo.
A workbook that marks itself. Answer in the yellow cells; the marking fills in as you go.
All parts of the book
Forty questions on the book
Seven on the equity bridge, seven on the mechanism, eight on working capital and the peg, eight on the earn-out, four on where the money moves, and six on the three cases below. None repeats the eighty of Appendix A. Numbers are marked to a tolerance, multiple choice to the letter, and the score sheet counts your errors part by part: that is your revision list.
Nothing is hidden. The marking sheet holds every answer, every tolerance, and the reason for each answer.
New material, not a restatement. Three situations the chapters name and never take to a number. Each case is one workbook: the note is the first sheet, the model is the rest, and a checks sheet closes it. Type your own figures in and every finding recomputes.
Chapters 10 to 13 · Case one
The ticker against what the box earns
Appendix A asks whether the ticker is a rate or a daily amount, and who receives the cash generated after the box date. In a locked box the buyer does. With interest, capital expenditure and tax ADDED, Meridian earns 0.60 a month for the buyer against a ticker of 0.34 for the seller: over the book’s three months 1.80 against 1.01. The ticker that pays the seller what the box earns is 10.68 per cent, or 19,770 euros a day, and at that rate the locked box beats completion accounts by 7.35, not 6.56. At a nine-month longstop (ADDED) the seller is short 2.37.
Chapters 20 to 27 · Case two
The band against the volatility
The workbook says to compare the band with the business’s own volatility and never does. Give the seller’s projection, the business at its target, a standard deviation of 1.5 (ADDED): over two years the cliff is worth 6.00 of its 12.00, the straight line 8.79 and linear from zero 11.60. The concession that looks free in the projection costs 2.79 on the seller’s own numbers. A cliff is worth the straight line only if it sits at 17.07, not 18.00: that is the size of the trade.
Appendix A, section eight · Case three
The vendor note at its ranking
Appendix A asks what a vendor note is worth at a rate that reflects its ranking. Take 15.0 of the 61.17 as a five-year note at 8 per cent, subordinated, discounted at 14 per cent (all ADDED): 11.45 rolled up, 11.64 with a blocker from year three, 11.91 paid in cash. The price is worth 57.61 in cash, and the seller would need 19.66 of note to be indifferent to 15.00 of cash. The rank sets the value, not the coupon.
The price on the signature page is agreed in a room and then decided in a document. Five
mechanisms move it, and on this transaction they are worth
€47.76 million against an enterprise value of €118.0 —
40.5 per cent. That figure is not a prediction: the five overlap and no deal fights all
of them to the maximum. It is a measurement of how much of the price is settled after the
handshake.
The bridge
€20.70m — two defensible readings of the same twelve items
The mechanism
€6.56m — locked box against completion accounts, identical terms
The peg
€7.00m — five defensible definitions of one sentence
Earn-out protections
€6.60m — six ordinary accounting choices
Earn-out shape
€6.90m — cliff against straight-line, same performance
The part of the mechanism nobody prices
Locked box against completion accounts is usually argued as an accounting preference. On identical
commercial terms it is worth €6.56 million, and
€11.90 million of that is timing of the argument, not accounting, more than the whole
difference, because the season runs €5.50 million the other way. In a
locked box the debt-like items are settled before signing, when the seller can still walk. In
completion accounts they are settled afterwards, by the buyer, on the buyer’s draft.
Stated that way it stops being a preference and becomes a term. It is also the one line in the
comparison that a seller can win by insisting early and cannot win at all once the mechanism is
agreed.
Why a cliff is conceded cheaply and paid for dearly
In the seller’s own projection the business hits its target, so a cliff and a straight-line
earn-out are worth exactly the same thing: everything. That is why the concession is easy to make
in a late session. In the case that actually happened here — six per cent short in one year,
three in the next — the straight-line version pays €6.90 million and the cliff
pays nothing.
The workbook makes the shape a dropdown (sheet 3, rows 17 to 24) so the two can be compared on the seller’s own
downside case rather than on its base case, which is the comparison that decides whether the
concession is cheap.
Conventions used throughout
Blue on a pale fill
an input — you may edit these
Black text
a formula — do not overtype these
Yellow fill
the assumptions that carry the answer
A cell containing 1 or 0
a switch: 1 applies the item, 0 removes it
Checks sheet
the printed figure beside the computed one, reproduced or to check, then the identities that hold for any inputs; each model workbook ends ALL OK, and so do the blank set and the cases
ADDED
a figure the book does not give, used in the cases and marked wherever it appears
Amounts are in millions of euros. Meridian Components is fictional and deliberately
ordinary: a seasonal working capital cycle, a pension scheme, some leases, a family shareholder
and a private equity buyer. Nothing about it is exotic, and that is the point.
Sixty-nine checks across the four model workbooks, and all sixty-nine pass: forty-nine
printed figures, each to the precision it is printed at, and twenty identities that hold for any inputs. If a check fails, the model is wrong
until proven otherwise — not the book.
Go beyond the companion files
Closing the Deal develops the complete framework behind these models, with the assumptions, trade-offs and worked examples tied together.
The workbooks open in Microsoft Excel, LibreOffice Calc, Google Sheets and Numbers; the PDF
prints on A4 or US Letter. They use no macros and no add-ins, so nothing needs to be enabled or trusted. If your spreadsheet asks
to update links on opening, decline — there are none.
What changed, and when
24 Sep 2026
The four model workbooks corrected, 69 checks. The mechanism’s timing of 11.90 is more than the whole difference of 6.56: the season runs 5.50 against the seller, not “the smaller half”. The same-month peg on the book’s own locked box timeline (completion in month 3) gives +2.80, not −1.50. The earn-out’s third shape, linear from zero, pays 11.43; the sheet had repeated the straight line. The shape dropdown this page described was added. Added: a blank set, thirteen working documents, forty questions that mark themselves, and three cases.
How do you calculate a locked box ticker?Equity value times the rate times days since the box date, over 365. A 5 per cent ticker on 80.0 million over 90 days is 986,301, against 1,479,452 earned.
How do you calculate a net working capital peg?Average the last 12 months, or match the completion month. A 19.68 million average peg pays +4.47 million at a June completion; a same-month peg pays +0.23.
How is leakage calculated in a locked box deal?Non-permitted payments since the box date, plus the costs and taxes they trigger, euro for euro: 3.99 million on a 64.0 million equity value here.
How much cash stays in a cash-free debt-free deal?Bank cash less uncleared payments, trapped cash and minimum operating cash: of 9.40m in the bank only 4.95m counts, cutting the seller's price by 4.45m.
How does an earn-out catch-up clause work?It re-tests cumulative EBITDA and pays back missed instalments: a year 2 miss costs the seller 1.091 million without one, and is fully recovered with one.
How do you size an earn-out to bridge a valuation gap?Value the clause on each side's forecast: 10x EBITDA above 10.0, capped at 20.0, is worth 14.63 to a seller expecting 12.0 and costs 6.88 to a buyer expecting 10.5.
Is deferred revenue a debt-like item in M&A?Only the excess over its normal level, if prepayments renew. On a €95.0m bridge, €9.0m of deferred revenue moves the equity price from €84.5m to €95.0m by treatment.
CMBS and CRE CLOsWhere the loss actually lands, from appraisal reduction to realised severity, and what the B-piece is really being paid for.
How to Read a Commercial LeaseThe three refinements chapter 19 names and never performs, and the renewal rate below which the mark-to-market is worth nothing.
How to Read a Credit AgreementWhere the default actually comes from, the cure that costs 5.5 times the other, and the capacity nobody adds up.
How to Read a Real Estate Loan AgreementThe cure ratio in closed form, the four-point window in which the cheap cure works, and the cure sized to the wrong threshold.
Office Real EstateA six per cent yield that returns 3.2 per cent once the re-letting cycle is paid for, and the headline-to-net-effective rent arithmetic.
Private Equity Real EstateBoth worked waterfalls to the dollar, the two capital stacks, and the arithmetic of the promote made changeable.
Private Markets PerformanceThirty-one of the thirty-three figures chapter 19 publishes reproduce exactly — and the two that do not are named rather than quietly adopted.
Raising a Real Estate FundThe chapter 17 funnel run on a calendar — when the first close actually lands, and why more travel does not help.
Real Estate FinanceFour people look at one building and reach four numbers; the lender is whole only above 105,109,489, twelve per cent below today’s value rather than forty.
Real Estate Financial ModelingProperty, development and fund models built line by line, and the modelling test worked end to end.
Real Estate Fund ManagementThe waterfall of 6.11, the build-to-core of 8.7 and the proceeds gap, reproduced as live formulas rather than asserted.
REIT Analysis and ValuationFFO of 532.0, AFFO of 381.0, net asset value and dividend safety — every figure a formula you can change.
Retail Real EstateThe occupancy cost of every unit in a centre, the sixteen per cent of the rent roll no tenant can sustain, and the right-size-convert-or-hold decision priced.
Sale and LeasebackA €179.5 million transaction end to end, with rent cover measured on the entity that actually signs the lease.
Self-Storage Real EstateThe cohort engine behind a 590-unit store, and the rate increase on existing customers priced against the move-outs it causes.
The Fund Finance ProfessionalChapter 8 builds the reported-to-eligible NAV bridge; chapter 9 computes every ratio without it. Two points at every state — and what a subscription line does to the IRR.
The Growth Equity InvestorWhat a pro rata cheque really costs, and the band where defending your ownership loses money.
The Private Credit InvestorThe two coverage ratios are not measured on the same thing: the erosion is 47.7 per cent, not the 28.7 the headline implies.
The Private Equity Fund Controller PlaybookThe book defines IRR, DPI, RVPI and TVPI, tells you to update them at the exit, and prints not one value. Computed: a 1.833× deal inside a fund at 0.892 TVPI.
The Venture Capital AssociateWhat defending a position costs, and how many companies a reserve pool actually defends.
Financial Risk ManagementA fund inside every limit that cannot meet a redemption — and the number that decides it is the one with no currency attached.
Business ValuationThree advisers land 26.8 per cent apart on one company, and the whole gap turns out to be 1.96 points of perpetual growth.
Quantitative FinanceThree models agree to a quarter of one per cent about a number that one unobservable input moves a hundred and three times as much.
Asset ManagementFour people quote four returns for one mandate, all correct and 2.7017 points apart — forty-eight times the manager’s net skill.
Alternative InvestmentsA manager reports 13.29 per cent and the endowment earns 6.26 — both correct, and only a third of the advertised advantage arrives.
Credit AnalysisFour defensible EBITDAs on one borrower give leverage from 3.19x to 6.47x — and the add-back argument is fifty times the covenant headroom.
Venture CapitalOne company out of twenty-eight returns 56.7 per cent of the fund, and half the capital goes in after the decision — at half the return.
Machine Learning for FinanceFive people quote the accuracy of one credit model, all five are right, and the number that decides how much money it makes is none of them.
Commercial Real Estate InvestingThe equity earned 8.6647 per cent and the investor received exactly 8.0000 — the preferred return, and nothing above it.
Mergers and AcquisitionsThe board paper says the deal creates 13,436,667 of value. The arithmetic says it destroys 17,530,855. Nobody is lying.
DerivativesThe treasury report says the hedge cost 1,233,698. That is the interest differential, not a cost.
Treasury ManagementFive cash balances for one company, all correct and 145,600,000 apart — and the revolver that is two-thirds of the liquidity leaves at a revenue fall of 8.4127 per cent.
Financial Planning and AnalysisRevenue 3.0190 per cent above budget and operating profit 16.3209 per cent below it, in the same quarter, with every figure correctly stated.
Energy TradingA position report that is 91.7031 per cent hedged and correctly computed, on a book that is short 2,542,000 MWh — and a margin call of 198,400,000 the next morning.
Construction Cost ControlA contract sum of 26,301,102 became a final account of 29,153,363 on the building that was drawn — and 85.8 per cent of what was lost was knowable on the day it was signed.
Trade FinanceSix routes to payment on one 4,200,000 export order cost between 178,040 and 223,268, a spread worth 14.8 per cent of the margin, and a day of buyer credit costs 1,031.76.
Cost AccountingOne factory costed twice on the same 13,440,000 of overhead, and 4,053,091 moves between four product families.
Pricing StrategyA list price of 148.00, a pocket price of 112.51, and the nine deductions in between — with what one point of price is actually worth.
Contract ManagementA bid 5.50 a unit cheaper, signed on paper worth 9.81 a unit more — and 94.68 per cent of it was knowable on the day of signature.
Capital MarketsFour defensible readings of one bond, the cost of an issue under each convention, and the placement discount computed at a constant discount.
Financial RegulationThree ratios pass and the fourth is in breach by 1,956.0 million: the output floor, the liquidity buffer after encumbrance, and the loan split.
Bank ManagementFour defensible readings of one balance sheet, the deposit beta measured two ways, and the liquidity that lasts 3.9 days.
The Real Estate WorkoutFour ways out of one broken loan, discounted to today, and the 58.7 cents at which a payoff beats enforcement.
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