Catching a Leakage Problem Before It Cost Anyone Money

The situation

Two weeks after Nasrin's company retained new counsel, Seo-yeon's advisors sent over a revised draft of the purchase agreement with a note that described the change as a small clarification to the interest calculation. It was not small. Nasrin, a former paramedic who had left the service years earlier to build a medical equipment supply company, was in the middle of her company's first acquisition: buying a well-regarded HVAC service business in Welland founded by Seo-yeon, who had trained as an HVAC technician before growing the company into a fifteen-truck operation with commercial and residential contracts across the region. Soraya, Nasrin's chief financial officer, had been running point on the numbers since the letter of intent was signed.

The deal used a locked-box structure, a common approach for a transaction in the roughly fifteen to thirty million dollar range where the buyer wants price certainty going into closing. Under a locked box, the parties agree on the target's balance sheet as of a fixed date in the past — the accounts date — and the price is set based on that snapshot rather than on a balance sheet prepared right at closing. Because weeks or months pass between the accounts date and the actual closing, the seller usually receives an interest ticker: a return, calculated as a daily or annual rate on the purchase price, that compensates the seller for the time value of money during the gap and effectively substitutes for the profits the business earns in that period.

The mechanism only works if two things hold. First, nothing of value can leave the company between the accounts date and closing outside the ordinary course of business — no special dividends, no bonuses paid to the seller, no assets transferred out — because the seller has already been paid for the business as it stood on the accounts date and is not entitled to strip more value out afterward. That is what 'no leakage' means. Second, the interest ticker itself has to be calculated correctly, on the right base, over the right period, at a rate both sides actually agreed to.

Nasrin's file had not started with our office. The deal had been negotiated for nearly four months by another lawyer, who withdrew from the file for reasons unrelated to the transaction partway through drafting. Nasrin's team retained us to pick up the file mid-stream, inheriting a partially negotiated agreement, a term sheet that fixed the accounts date, and a working relationship with the other side that had already developed its own rhythm and its own blind spots.

The complication

Picking up a file mid-negotiation means reconstructing what has already been agreed, what is still open, and what has quietly been assumed by both sides without ever being written down. The previous lawyer's notes covered the broad terms but had not flagged the interest ticker as an issue, and the draft agreement on file calculated the ticker using a formula that, on its face, looked standard enough that a reviewer moving quickly could easily have signed off on it without a second look.

Reviewing it against the accounts date fixed months earlier turned up the problem. The ticker was structured to accrue interest on the full headline purchase price from the accounts date through to closing, which is the usual approach. But the rate applied had been drafted to compound rather than accrue simply, and the accounts date used in the formula did not match the accounts date defined elsewhere in the agreement — it was ten days earlier, which meant ten additional days of accrued interest built into the ticker, and on a transaction of this size that worked out to a meaningful amount in Seo-yeon's favour, paid on top of the purchase price at closing and easy to miss because the two references to the accounts date sat in different articles of a long document.

It was not clear whether this was a drafting error carried over from an earlier version of the agreement or a deliberate change introduced when Seo-yeon's advisors sent their revised draft. Either way, correcting it required going back to first principles: pulling the executed letter of intent, confirming the accounts date the parties had actually agreed to, and rebuilding the interest ticker calculation from that fixed point rather than trusting the number already sitting in the draft, however routine it appeared.

There was a second layer underneath the ticker issue. Because a locked box only protects the buyer if no value leaks out of the company after the accounts date, the draft agreement's leakage protections needed the same scrutiny. The version on file had a leakage indemnity, but it defined permitted leakage broadly enough that ordinary management fees, a category Seo-yeon's advisors had inserted without much explanation, could have covered a range of payments to Seo-yeon personally between the accounts date and closing without triggering any obligation to repay the buyer. Left unchanged, that carve-out would have made the interest ticker fix meaningless, since value could still have left the company through a different door.

What we did

1. Reconstructed the deal history from the file we inherited, cross-checking the previous lawyer’s notes against the executed letter of intent to confirm what had actually been agreed on the accounts date, the price, and the structure. Working from the original signed document, rather than the draft agreement’s own internal definitions, was the only way to find where the discrepancy was actually hiding, since the draft’s definitions were themselves part of the problem.
2. Recalculated the interest ticker from the confirmed accounts date, using simple accrual on the agreed purchase price rather than the compounding formula in the draft, and corrected the ten-day discrepancy in the reference date. Rebuilding the calculation from first principles, rather than adjusting the existing formula, was necessary because the draft could not be trusted as a starting point; the fix alone reduced the amount Seo-yeon’s side could claim at closing by a figure in the low hundreds of thousands.
3. Requested Seo-yeon’s advisors explain the change in writing before assuming bad faith, since a drafting carryover was equally plausible as a deliberate change and accusing the other side prematurely would have poisoned a negotiation that still needed to close cooperatively. Their response confirmed it had been an error introduced when adapting a template from an earlier, unrelated deal, and they agreed to the correction without argument once it was raised directly and documented in writing.
4. Tightened the definition of permitted leakage in the purchase agreement, narrowing the management fee carve-out to a fixed, disclosed monthly amount consistent with what Seo-yeon had actually been paying herself historically. This closed the second door value could have left through, since an open-ended category would have let payments to Seo-yeon personally pass unchecked between signing and closing regardless of how carefully the interest ticker itself had been corrected.
5. Added a leakage certificate requirement at closing, obliging Seo-yeon to confirm in writing, backed by bank statements, that no leakage beyond the permitted categories had occurred between the accounts date and closing, with a dollar-for-dollar repayment obligation if the certificate later proved inaccurate. Turning the leakage promise into a signed, evidenced statement gave Nasrin’s company a concrete claim to fall back on rather than a bare contractual assumption.
6. Ran a focused review of the company’s bank records for the period since the accounts date, checking for exactly the kind of special payments the leakage indemnity was meant to catch. Confirming independently that none had occurred, rather than relying on Seo-yeon’s own representation alone, meant the protections we built into the agreement were a safeguard against a risk that had not yet materialized, not a response to a problem we had already found.
7. Briefed Nasrin and Soraya on the corrected numbers in plain terms before the final agreement was signed, walking through what the original draft would have cost the company against what the corrected version protected. Laying out the comparison in concrete dollar terms, rather than describing the fix abstractly, let the board see the actual value the review had produced rather than treating it as routine legal process.
8. Coordinated a clean handover of open items with Seo-yeon’s advisors so nothing else from the earlier lawyer’s file went unresolved, confirming in a short closing checklist that every outstanding point had either been closed out or explicitly carried forward with an owner assigned to it. Building that checklist mattered specifically because a mid-file handover creates real risk that something the previous lawyer had flagged quietly falls through the gap between counsel.
9. Confirmed the corrected agreement matched the letter of intent on every commercial point, not just the interest ticker, since a mid-file handover carries a real risk that other terms drift during redrafting without either side noticing until it is too late to fix cheaply. This final cross-check gave Nasrin’s company confidence that the ticker was not the only place a quiet drift had occurred.

The outcome

The transaction closed on the corrected terms, with the interest ticker calculated on the right date and the right formula, and with leakage protections that actually did the job a locked-box structure is supposed to do. No payment left the target company outside the disclosed and permitted categories between the accounts date and closing, and the leakage certificate Seo-yeon signed at closing confirmed that in writing, backed by the bank records we had already reviewed independently.

Because the problem was caught during drafting rather than after closing, there was nothing to unwind, no repayment claim to chase, and no dispute for either side to litigate. Seo-yeon's advisors accepted the correction once it was explained, and the file closed on a normal timeline despite the mid-stream change of counsel. The interest ticker correction alone meant Nasrin's company paid a purchase price that reflected what the parties had actually agreed to in the letter of intent, rather than a higher figure that had crept in during redrafting and might otherwise have gone unnoticed until well after money had changed hands.

Soraya said afterward that the hardest part of taking over a partially negotiated file was not knowing which details had already been settled and which were still live, and that the exercise of rebuilding the numbers from the original letter of intent was worth doing even though it slowed the file down for about a week. Nasrin's company completed its first acquisition on schedule, with a locked-box mechanism that worked the way it was designed to, and Seo-yeon transitioned out of daily operations over the following months as planned, on terms neither side had reason to revisit. For a company doing its first acquisition, the file became something of a template: Soraya kept the corrected ticker calculation and the leakage certificate wording on hand for the next deal, rather than treating either as a one-time fix specific to this transaction.

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