Glossary
Locked box
A pricing mechanism in which the price for the shares is fixed by reference to a balance sheet at an agreed date before completion. From that date the economic risk and reward of the business pass to the buyer, and the seller promises that no value will leave the business in the meantime.
In plain English
Imagine the business is put in a box and locked at a date before completion, usually the date of the last audited or reviewed balance sheet. The buyer and seller agree the price based on the cash, debt and working capital shown at that date. Between the locked box date and completion, the seller agrees not to take value out (no dividends, no unusual payments to shareholders, nothing outside the ordinary course). These are known as leakage protections. The price is then certain at signing and there is no after completion adjustment.
The alternative is completion accounts, where the price is adjusted after completion to reflect the actual position on the day.
Why it matters
Sellers generally prefer a locked box because the price is known and the process ends at completion. Buyers accept it where they trust the locked box balance sheet and are compensated for the period of ownership before completion, sometimes through an agreed daily amount or interest. The quality of the locked box accounts is therefore central.
What to watch for
- The locked box date should be recent enough for the accounts to be reliable and for the buyer to be comfortable.
- Permitted leakage (such as agreed salaries and ordinary-course payments) needs to be defined precisely.
- The seller gives protections against leakage, usually backed by an obligation to repay any that occurs.
- The mechanism is agreed in heads of terms and documented in the sale agreement.
Transaction language and legal treatment depend on the agreement and the jurisdiction. Written by Motion Advisory Partners as general guidance, not legal advice.