Locked Box
A locked box is a pricing mechanism in which the equity price of a company is fixed at signing by reference to a balance sheet dated before the deal, with the seller promising that no value has left the company since that date except as agreed. The alternative, completion accounts, sets the price after completion instead.
- Also known as
- Locked-box mechanism, Locked box pricing
- Used at
- the price clause of a share purchase agreement
- Binding
- yes; the seller gives a no-leakage covenant from the accounts date to completion
- The reference
- audited or reviewed accounts, typically 2–5 months before signing
- Leakage
- dividends, management fees, bonuses, related-party payments — anything that moves value to the sellers
- Compensation
- a ticking fee or interest on the price from the accounts date, since the buyer takes the profit from then
How a locked box works in practice
A buyer prices a company on its cash, debt and working capital. Those numbers move every day, so the two sides have to agree which day counts. A locked box picks a day in the past — the date of the last audited balance sheet — and says: the price is calculated on that balance sheet, the business is the buyer's from that day in economic terms, and the seller may not take value out between then and completion. Anything that does leave is "leakage", and the seller repays it pound for pound after completion, without cap or time limit for the covenant.
The seller likes a locked box because the price is certain at signing and the deal is done at completion, with no second negotiation over accounts. Private equity sellers, who want to distribute proceeds and close a fund, use it almost by default. The buyer accepts it when the accounts are reliable and recent, and prices the wait: because the profits from the accounts date belong to the buyer while the cash stays with the seller until completion, the seller charges interest — a ticking fee — on the price for the gap.
For a fintech the balance sheet has one line that needs care: safeguarded client funds and the matching liability, which are not the company's cash and must be excluded from the price on both sides.
Example
A payments company's audited balance sheet at 31 March shows net cash of £2.1m and normalised working capital. The buyer offers an enterprise value of £40m, so the locked-box equity price is £42.1m, fixed at signing on 20 June, plus a ticking fee of 5% a year on £42.1m from 1 April to completion — £5,767 a day. Completion on 15 September adds £966,000 of ticking fee. In diligence after completion the buyer finds a £180,000 bonus paid to a director in May that was not in the permitted-leakage list; the sellers repay it.
Common mistakes
- Locking the box on accounts too old to trust, so the buyer is pricing a business that no longer exists. - A permitted-leakage list that forgets the ordinary items — management salaries, agreed dividends — so every payment becomes an argument. - Sellers who forget that the ticking fee is a cost of delay, and let completion drift. - Treating safeguarded client funds as the company's cash on the reference balance sheet. - Choosing a locked box for a business whose working capital swings with the season, where completion accounts would price it fairly.