Locked Box

The locked box is a price mechanism in which the purchase price is fixed based on a past balance sheet date. From this date onward, the economic opportunities and risks already pass to the buyer. The price is therefore fixed early and is no longer adjusted after closing. The basis is audited or at least reliable accounts as at that date, from which net debt and working capital are derived.

Because the buyer is economically entitled from that date but does not yet control the company, the central protection is the prohibition on leakage: the agreement bars distributions, payments to the seller and its related parties, assumption of the seller's transaction costs, remuneration increases outside the ordinary course and similar events, while expressly defining permitted items such as ordinary salaries and arm's length trading relationships. Any breach is reimbursed by the seller one for one, often with no de minimis threshold. The structure is regularly complemented by interest on the purchase price from the reference date to completion, compensating for value created in the meantime. Its advantages are price certainty, a simple completion and the absence of a costly post-closing reconciliation, which makes the mechanism popular in auctions.

The disadvantage for the buyer is bearing the risk of developments between the reference date and completion, which makes a long period problematic. Sellers should note that the structure requires reliable accounts at the chosen date, because the buyer relies on them. Unaudited interim accounts regularly lead to further demands or to protection through additional warranties. The treatment of events that are permitted but nevertheless reduce value, such as unusually high capital expenditure, also needs settling. An obligation to run the business in the ordinary course for the period before completion is therefore common.