Purchase Price Mechanisms in Turkish M&A Transactions: Locked Box, Completion Accounts, Earn-Outs, Escrow and Deferred Consideration

Introduction

Determining the headline value of a company is only the beginning of pricing an M&A transaction in Turkey.

A buyer and seller may agree that a company is worth EUR 20 million, but this does not necessarily mean that EUR 20 million will be transferred to the seller at closing. The final amount may depend on the company’s debt, cash position, working capital, shareholder loans, transaction expenses, historical distributions and performance after closing.

For this reason, sophisticated share purchase agreements generally contain a detailed purchase price mechanism.

The mechanism determines how enterprise value is converted into the amount actually payable for the shares and allocates financial risk between signing, closing and, in some transactions, a later measurement period.

The most commonly encountered structures in Turkish private M&A transactions include:

• Locked-box pricing;
• Completion accounts;
• Cash-free/debt-free adjustments;
• Working capital adjustments;
• Earn-outs;
• Deferred consideration;
• Escrow and purchase price retention;
• Holdbacks for identified liabilities.

Although these concepts originate largely from international M&A practice, their contractual implementation in Turkey must be coordinated with the Turkish Code of Obligations, Turkish Commercial Code, tax legislation and the corporate structure of the target.

Enterprise Value and Equity Value

One of the first distinctions in an M&A transaction is between enterprise value and equity value.

Enterprise value represents the negotiated value of the operating business independent of its financing structure.

Equity value represents the amount attributable to shareholders after agreed adjustments.

A simplified pricing formula frequently used in transactions is:

Equity Value = Enterprise Value + Cash – Debt ± Working Capital Adjustment – Other Agreed Adjustments

Suppose the parties agree on an enterprise value of EUR 20 million.

If the target has EUR 2 million of debt and EUR 500,000 of cash, the preliminary equity value may be EUR 18.5 million before other adjustments.

However, whether a particular balance-sheet item qualifies as “cash” or “debt” can itself become highly contentious.

The share purchase agreement should therefore define these concepts precisely rather than relying only on accounting terminology.

Cash-Free, Debt-Free Transactions

Many Turkish M&A transactions are negotiated on a cash-free, debt-free basis.

The commercial assumption is that the seller delivers the company with a normal level of working capital but without financial debt, while retaining or receiving credit for the company’s cash.

The exact meaning depends entirely on the SPA definitions.

“Debt” may include more than bank loans.

Depending on negotiations, it may also include financial leasing liabilities, shareholder loans, accrued interest, overdue taxes, unpaid social security liabilities, factoring arrangements, guarantees that have crystallised and certain transaction-related costs.

The seller may argue that ordinary trade payables are working capital rather than debt.

The buyer may argue that unusually overdue supplier debt or unpaid taxes should be treated as debt-like items.

These classification issues frequently have a direct one-for-one effect on the final purchase price.

Debt-Like Items

A professionally drafted transaction should identify potential debt-like items during financial and legal due diligence.

Examples may include overdue tax liabilities, unpaid employee bonuses relating to the pre-closing period, unpaid transaction expenses, shareholder balances, accrued interest and certain litigation liabilities.

Whether an item is treated as debt, working capital or a warranty matter should be agreed before signing.

The parties should avoid double counting.

For example, if an unpaid tax liability has already reduced the purchase price as a debt-like item, the buyer should not ordinarily obtain a second recovery for exactly the same amount under a tax indemnity.

The SPA should expressly coordinate the purchase price mechanism with warranties and indemnities.

Working Capital Adjustments

A buyer normally expects to acquire an operating company with sufficient working capital to continue normal operations immediately after closing.

Without a working capital adjustment, a seller could potentially accelerate collection of receivables, delay supplier payments and extract cash before closing while technically delivering a debt-free company.

Working capital adjustments are intended to prevent this result.

The parties generally agree on a target or normalised working capital level.

Actual working capital at closing is then compared with the target.

If actual working capital is higher, the purchase price may increase.

If it is lower, the purchase price may decrease.

The definition of working capital is therefore critical.

It commonly involves selected current assets and current liabilities, but the SPA should expressly identify the included and excluded accounting items.

Determining Normal Working Capital

Determining the working capital target is often more difficult than calculating closing working capital.

The target should generally reflect the level of working capital required to operate the business in the ordinary course.

Historical averages may be used, but adjustments may be necessary for:

• Seasonal businesses;
• Rapid growth;
• Extraordinary inventory levels;
• One-off receivables;
• Unusual supplier terms;
• Changes in business model.

For a tourism company, for example, working capital may fluctuate substantially between winter and summer.

Using an annual average without accounting for the closing date may create an artificial adjustment.

The financial advisers and M&A lawyers should therefore coordinate the target with the economic characteristics of the business.

Completion Accounts

Under a completion accounts mechanism, the final purchase price is determined by reference to financial information as of the closing date.

The parties usually agree an estimated purchase price at closing.

Following closing, completion accounts are prepared showing agreed financial metrics such as cash, debt and working capital.

The final purchase price is then calculated.

This mechanism protects the buyer from deterioration in the target’s financial position between signing and closing, but it creates a period of post-closing uncertainty for the seller.

Preparing Completion Accounts

The SPA should state who prepares the completion accounts.

In many transactions, the buyer prepares them because it controls the target after closing.

The seller is then given a specified period to review the accounts and submit objections.

The agreement should regulate:

• Preparation period;
• Accounting principles;
• Information access;
• Review rights;
• Objection procedure;
• Expert determination;
• Payment of the final adjustment.

The accounting rules are particularly important.

It is not sufficient to say that the accounts will be prepared according to “generally accepted accounting principles.”

The parties may disagree over provisions, accruals, inventory valuation, bad debts and revenue recognition.

The SPA should therefore establish a hierarchy of accounting principles.

Hierarchy of Accounting Principles

A typical hierarchy may provide that completion accounts will be prepared first in accordance with specific accounting policies set out in the SPA, secondly consistently with historical accounting practices of the target and finally in accordance with the applicable accounting standards.

This hierarchy helps prevent the buyer from adopting a new accounting policy after closing merely because it produces a lower purchase price.

The seller should also ensure that the buyer cannot manipulate completion accounts through post-closing business decisions.

Similarly, the buyer should ensure that historical accounting practices cannot be used to preserve an obviously inappropriate treatment.

Completion Accounts Disputes

Completion account disputes are normally accounting disputes rather than traditional legal disputes.

For this reason, SPAs frequently provide that disagreements will be referred to an independent accountant.

The agreement should specify:

• How the expert is appointed;
• Scope of the expert’s authority;
• Whether the expert acts as expert or arbitrator;
• Submission timetable;
• Allocation of costs;
• Final and binding effect of the determination.

The expert should generally be limited to disputed accounting items.

Questions concerning contractual interpretation may remain subject to the dispute resolution provision of the SPA.

Locked-Box Mechanism

A locked-box mechanism offers an alternative to completion accounts.

Instead of calculating financial figures as of closing, the purchase price is determined by reference to an agreed historical balance-sheet date known as the locked-box date.

The buyer effectively assumes the economic benefit and risk of the business from that date, even though legal ownership transfers later.

There are generally no post-closing completion accounts.

The seller instead promises that no unauthorised value will be extracted from the target between the locked-box date and closing.

This value extraction is known as leakage.

Why Sellers Prefer Locked Box

A locked-box mechanism provides considerably greater price certainty.

The seller knows the purchase price at signing and may be able to distribute transaction proceeds shortly after closing without waiting for post-closing accounting adjustments.

This can be particularly attractive for:

• Private equity exits;
• Auction transactions;
• Multiple sellers;
• Transactions where sellers require a clean exit.

The buyer, however, must have confidence in the locked-box accounts because it assumes economic risk from the historical locked-box date.

High-quality financial due diligence is therefore essential.

Leakage

Leakage generally means the transfer of economic value from the target to the seller or its related parties after the locked-box date.

Typical leakage may include dividends, distributions, repayment of shareholder loans, management fees, related-party payments, transfer of assets below market value or payment of transaction expenses for the seller’s benefit.

The seller normally undertakes that no leakage has occurred and will not occur before closing.

Unauthorised leakage is usually reimbursed on a one-for-one basis.

This reimbursement right may sit outside ordinary warranty baskets and liability caps.

Permitted Leakage

Not every payment to the seller or related parties must be prohibited.

The SPA may specifically identify permitted leakage.

For example, this may include agreed management salaries, pre-approved transaction costs, specified dividends or ordinary payments under existing commercial arrangements.

The key is transparency.

Amounts should ideally be quantified or capable of objective calculation.

A provision permitting “ordinary payments to shareholders” may create significant uncertainty.

Locked-Box Interest or Value Accrual

Because the buyer receives the economic benefit of profits generated after the locked-box date, sellers sometimes negotiate additional consideration for the period between the locked-box date and closing.

This may take the form of a fixed amount or agreed daily accrual.

The commercial rationale is that the seller has effectively left its equity invested in the business during that period.

The appropriate mechanism depends on the financial performance of the target and the transaction valuation.

Locked Box or Completion Accounts?

Neither mechanism is universally preferable.

A locked box offers price certainty but requires reliable historical accounts and strong leakage protection.

Completion accounts reflect the target’s actual financial position at closing but create post-closing uncertainty and potential accounting disputes.

The choice may depend on:

• Quality of financial records;
• Length of signing-to-closing period;
• Business volatility;
• Seller bargaining power;
• Auction dynamics;
• Number of sellers;
• Private equity involvement.

A stable and well-audited company may be suitable for locked-box pricing.

A rapidly changing or highly seasonal company may justify completion accounts.

Purchase Price Adjustment Versus Warranty Claim

The distinction between a price adjustment and a warranty claim is important.

A purchase price adjustment determines what the buyer should have paid for the shares.

A warranty claim compensates the buyer because a contractual statement concerning the target was incorrect.

The same fact should not normally generate recovery twice.

For example, suppose an undisclosed EUR 500,000 bank loan is included as debt in the completion accounts and reduces the final purchase price by EUR 500,000.

The buyer should not ordinarily receive another EUR 500,000 simply because the existence of the loan also breached a warranty.

The SPA should contain an express prohibition against double recovery.

Earn-Outs

An earn-out makes part of the purchase price dependent on the target achieving specified results after closing.

Earn-outs are particularly useful where buyer and seller disagree over the company’s future value.

The seller may believe that the business will grow rapidly, while the buyer is unwilling to pay immediately for growth that has not yet occurred.

Rather than abandoning the transaction, the parties may agree on a fixed amount at closing and additional payments if performance targets are achieved.

Financial Earn-Outs

Common financial metrics include:

• Revenue;
• EBITDA;
• EBIT;
• Net profit;
• Gross margin;
• Recurring revenue.

Revenue may be easier to measure but does not necessarily reflect profitability.

EBITDA may better reflect operating performance but can generate disputes concerning accounting treatment and group charges.

Net profit is even more exposed to depreciation, financing, tax and accounting decisions.

The metric should therefore be selected according to the economics of the target.

Operational Earn-Outs

An earn-out does not have to be based exclusively on financial performance.

It may depend on achieving specified milestones such as obtaining a regulatory licence, launching a product, reaching a customer target, opening specified locations or completing a technology-development milestone.

Milestone-based earn-outs are common in technology, healthcare and regulated businesses.

The milestones should be objectively verifiable.

Terms such as “successful launch” or “satisfactory commercial performance” should be avoided unless they are carefully defined.

Control During the Earn-Out Period

One of the most difficult aspects of an earn-out is that the buyer normally controls the company after closing.

The seller’s additional purchase price may therefore depend on decisions made by the buyer.

Suppose the earn-out depends on EBITDA.

The buyer could potentially increase group management fees, accelerate hiring, defer revenue or make a major investment that reduces short-term EBITDA.

Even if commercially justified, these decisions could reduce the seller’s earn-out.

The SPA should therefore regulate the buyer’s conduct during the earn-out period.

Buyer Covenants During Earn-Out

The seller may request undertakings that the buyer will operate the business in the ordinary course and will not take actions primarily intended to reduce the earn-out.

The seller may also seek restrictions concerning:

• Diversion of customers;
• Related-party charges;
• Changes in accounting policies;
• Business transfers;
• Extraordinary expenses;
• Closure of business lines.

The buyer will generally resist restrictions that prevent it from managing a company it has purchased.

The appropriate solution is usually a balanced covenant protecting the calculation from manipulation without giving the seller continuing control over the business.

Earn-Out Information Rights

The seller may require access to information necessary to verify the earn-out.

This may include periodic management accounts, calculation statements and supporting financial records.

The SPA should establish an objection procedure similar to completion accounts.

Disputes concerning financial calculations may be referred to an independent expert.

The seller’s information rights should remain subject to confidentiality and personal data requirements.

Deferred Consideration

Deferred consideration differs from an earn-out.

In an earn-out, the seller’s entitlement depends on future performance.

In deferred consideration, the amount is already fixed but payment occurs later.

For example, a buyer may agree to pay EUR 8 million at closing and EUR 2 million twelve months later.

Deferred payments may help the buyer manage acquisition financing, but they create credit risk for the seller.

Securing Deferred Payments

A seller agreeing to delayed payment should consider whether the buyer will remain financially capable of paying the balance.

Possible protection may include a bank guarantee, parent company guarantee, escrow, share pledge or other agreed security.

The seller may also seek acceleration if the buyer defaults, becomes insolvent or sells the target.

The transaction agreement should address whether the buyer may set off warranty or indemnity claims against deferred consideration.

Set-off provisions are commercially significant.

An unrestricted right of set-off may effectively allow the buyer to withhold the entire deferred amount whenever a dispute arises.

Escrow

An escrow mechanism may protect the buyer against post-closing claims while allowing the majority of the purchase price to be paid at closing.

A portion of the purchase price is deposited with an independent bank or escrow agent.

The funds are released after an agreed period unless valid claims have been made.

Escrow is commonly used to secure:

• Warranty claims;
• Tax liabilities;
• Pending litigation;
• Purchase price adjustments;
• Specific indemnities.

The escrow agreement should identify the release mechanism precisely.

Escrow Amount and Duration

The appropriate escrow amount depends on the transaction.

There is no statutory percentage applicable to Turkish private acquisitions.

The amount should reflect due diligence findings, warranty coverage, seller creditworthiness and identified risks.

Different escrow accounts may be used for different risks.

For example, a general warranty escrow may be released after eighteen months, while a separate tax escrow remains until a particular tax inspection is resolved.

The parties should also specify who receives interest earned on the escrowed funds and who bears bank costs.

Purchase Price Retention

Instead of depositing money with a third party, the buyer may retain part of the price.

Retention can be administratively simpler than escrow.

However, the seller assumes the buyer’s credit risk and may have less comfort regarding release.

The agreement should therefore clearly define:

• Retained amount;
• Release date;
• Permitted deductions;
• Claim procedure;
• Interest, if any;
• Consequences of buyer insolvency.

Holdbacks for Specific Risks

A due diligence review may identify a specific liability that cannot be resolved before closing.

For example, the target may be involved in litigation with a maximum estimated exposure of EUR 1 million.

The parties may agree that EUR 1 million of the price will be withheld until the dispute is resolved.

A specific holdback can sometimes be more efficient than attempting to reduce the entire company valuation.

The SPA should regulate whether the seller receives any unused balance once the relevant risk is resolved.

Purchase Price and Shareholder Loans

Many Turkish companies are financed partly through shareholder loans.

An M&A agreement should distinguish clearly between:

• Purchase price for shares;
• Repayment of shareholder loans;
• Accrued interest;
• Other related-party balances.

Assume the seller owns shares valued at EUR 10 million and has also lent EUR 2 million to the target.

A payment of EUR 12 million cannot safely be described simply as the “purchase price.”

The legal, tax and accounting nature of each payment should be identified.

At closing, the shareholder loan may be repaid, assigned to the buyer, capitalised or remain outstanding depending on the negotiated structure.

Transaction Expenses

Another pricing issue concerns transaction-related expenses.

These may include:

• Investment banking fees;
• Legal fees;
• Financial advisory fees;
• Management bonuses;
• Change-of-control payments;
• Transaction insurance premiums.

The parties must decide whether these costs are borne by the seller, target or buyer.

If the target pays expenses incurred solely for the seller’s sale process, the buyer may treat them as debt-like items or leakage.

The classification should be determined in advance.

Shareholder Distributions Before Closing

Sellers may wish to extract excess cash before transferring the company.

This may be achieved through dividends or repayment of shareholder balances, subject to applicable corporate and tax rules.

The transaction documents should clearly state whether distributions are permitted.

In a locked-box transaction, unauthorised distributions may constitute leakage.

In completion accounts, a pre-closing distribution may simply reduce closing cash and therefore reduce the equity value.

The legal effect differs depending on the pricing mechanism.

Foreign Currency Purchase Prices

Cross-border M&A transactions are often negotiated by reference to EUR or USD.

The parties should review the foreign exchange regulations applicable at the date of signing and payment, particularly where the buyer and seller are both Turkish residents.

Turkey’s foreign currency contracting rules contain a number of exceptions and have been amended repeatedly.

Accordingly, the permissible denomination and payment currency should be confirmed for the specific parties and transaction rather than assumed from an international template.

The agreement should also regulate the exchange rate if calculations involve both Turkish lira and foreign currency.

Tax Treatment of Purchase Price Adjustments

The legal character of a post-closing payment may affect its tax and accounting treatment.

A payment may constitute:

• Adjustment to share purchase price;
• Interest;
• Compensation;
• Earn-out consideration;
• Repayment of debt.

The parties should ensure that transaction documents, bank payment descriptions and accounting treatment are consistent.

An earn-out paid several years after closing should not be structured without analysing how it will be treated for tax purposes.

Tax advisers should therefore review the pricing mechanism before the SPA is finalised.

Contractual Freedom and Turkish Law

Turkish law generally allows parties substantial contractual freedom in determining purchase price and payment mechanics.

Article 26 of the Turkish Code of Obligations recognises the parties’ freedom to determine the content of their contract within the limits of law.

Article 27 limits this freedom where contractual provisions violate mandatory law, morality, public order, personal rights or concern an impossible subject.

Accordingly, internationally recognised pricing concepts such as locked box, completion accounts and earn-outs may be used in Turkish-law-governed transaction documents, but the underlying obligations should be drafted in a way capable of enforcement under Turkish contract law.

The substance of the parties’ rights and obligations is more important than merely importing English M&A terminology.

Price Adjustment Dispute Resolution

Post-closing price disputes can become expensive if they are automatically submitted to full arbitration or court proceedings.

Accounting disputes are often better referred to an independent financial expert.

Legal disputes concerning interpretation of the SPA may remain subject to arbitration or the competent courts.

The agreement should clearly distinguish between the two.

For example, whether a particular amount appears in the accounts may be an accounting question.

Whether that amount falls within the contractual definition of “Debt” may involve contractual interpretation.

Without a clear allocation of jurisdiction, the parties may dispute not only the price but also which decision-maker has authority to decide it.

Common Purchase Price Disputes

Purchase price disputes frequently arise because the parties negotiated a headline valuation before agreeing on the definitions required to calculate the actual payment.

Typical disagreements concern treatment of shareholder loans, overdue taxes, bonuses, lease liabilities, restricted cash, unpaid dividends, customer advances, deferred revenue and transaction expenses.

Other disputes arise from inconsistent accounting policies between historical accounts and closing accounts.

The most effective solution is to agree detailed definitions and accounting examples before signing rather than attempting to resolve conceptual questions after closing.

Drafting a Purchase Price Schedule

For complex transactions, the SPA should contain a separate purchase price schedule.

The schedule may include worked numerical examples demonstrating the intended calculation.

This can be extremely valuable.

A formula that appears clear in legal drafting may produce different results when accountants apply it to actual numbers.

Worked examples allow the legal and financial teams to identify inconsistencies before signing.

The final schedule should correspond with the closing funds flow.

Relationship With Due Diligence

The pricing mechanism should reflect due diligence findings.

If due diligence identifies abnormal debt, working capital deficiencies or seller-related payments, those matters may justify adjustment to the price mechanism.

Some risks should be addressed through purchase price.

Others are more appropriately protected through warranties or indemnities.

The fundamental question is whether the issue is already reflected in the agreed value of the company or represents a contingent future exposure.

Attempting to solve every due diligence issue through warranties can leave the buyer paying too much at closing and then attempting to recover money later.

Buyer Considerations

From the buyer’s perspective, the purchase price mechanism should ensure that the business delivered at closing corresponds with the valuation assumptions.

The buyer should understand the target’s normal working capital, financial debt, cash requirements and potential debt-like liabilities.

Completion accounts may provide protection where the financial position could change materially before closing.

Where a locked box is used, the buyer should conduct detailed financial due diligence and obtain robust leakage protection.

If deferred consideration or earn-outs are used, future payment obligations should be objectively measurable.

Seller Considerations

The seller generally seeks price certainty and limited post-closing exposure.

A locked-box mechanism may therefore be preferable where reliable accounts are available.

If completion accounts are unavoidable, the seller should ensure that accounting policies cannot be changed after closing merely to reduce the price.

Earn-out provisions should protect the seller from deliberate manipulation while recognising the buyer’s legitimate right to operate the business.

Escrow and retention should be limited in amount and duration and should contain clear release mechanisms.

Practical Purchase Price Checklist

Before signing an M&A agreement in Turkey, parties should generally confirm:

1. Enterprise value and intended equity value.
2. Whether pricing is cash-free and debt-free.
3. Exact definitions of cash and debt.
4. Treatment of debt-like items.
5. Normal working capital target.
6. Locked-box or completion accounts mechanism.
7. Accounting policies and calculation hierarchy.
8. Leakage and permitted leakage.
9. Transaction expense treatment.
10. Shareholder loan treatment.
11. Earn-out metrics and operating covenants.
12. Deferred consideration and payment security.
13. Escrow or retention arrangements.
14. Set-off rights.
15. Expert determination procedure.
16. Treatment of taxes and transaction costs.
17. Currency and payment mechanics.
18. Prevention of double recovery.
19. Relationship with warranties and indemnities.
20. Closing funds flow.

Conclusion

Purchase price provisions determine the actual economic outcome of a Turkish M&A transaction.

A headline company valuation alone does not determine what the seller ultimately receives. Cash, debt, working capital, shareholder loans, transaction expenses, leakage and post-closing performance may materially alter the final consideration.

Locked-box mechanisms offer price certainty but require reliable financial information and strong leakage protection. Completion accounts provide a closing-date adjustment but may generate post-closing accounting disputes. Earn-outs can bridge valuation differences but require detailed rules governing calculation and buyer conduct.

Escrow, retention and deferred consideration may provide additional flexibility, but they also create enforcement and credit risks that must be addressed contractually.

The purchase price mechanism should therefore be negotiated simultaneously by the legal, financial and tax teams. Detailed definitions, accounting principles and numerical examples can prevent disputes that might otherwise arise months after the acquisition has closed.

In Turkish M&A practice, the strongest transaction documents are those that translate the commercial valuation agreed by the parties into a clear, objectively calculable and legally enforceable payment structure.