Locked-Box Mechanism
AdvancedA locked-box mechanism is a way of fixing the price in an acquisition based on a balance sheet at an agreed date before signing, with no adjustments after completion, while the seller promises not to take value out of the business in the meantime.
In a locked-box deal, the buyer and seller agree a price based on a recent historical balance sheet, called the locked-box date. From that date, the economic risks and rewards of the business pass to the buyer, even though completion happens later.
The seller promises that no value will leak from the business between the locked-box date and completion, for example through dividends, unusual payments to the owners or management fees, except for permitted items agreed in advance. If prohibited leakage occurs, the seller must repay it.
For example, a buyer agrees a price of 200,000,000 based on the balance sheet at 31 December, with completion in April. The seller cannot pay dividends or bonuses in the meantime.
Locked-box mechanisms are common in Europe and the United Kingdom, particularly in auctions run by private equity sellers. They give price certainty and avoid post-completion disputes, but buyers must rely on thorough due diligence of the locked-box balance sheet. The alternative is completion accounts.
For worked examples and full lessons, visit notesbysara.org.