What Is a Locked Box Mechanism?
Under a locked box, the parties agree on a fixed equity purchase price calculated from a recent, reliable balance sheet, called the locked box date accounts. From that date forward the business belongs economically to the buyer even though legal closing happens months later, and the price does not move based on the balance sheet delivered at completion.
This stands in contrast to the completion accounts approach that dominates US deals, where the price is trued up after closing against a working capital peg and measured cash and debt balances. The locked box eliminates the post-closing adjustment process entirely, trading flexibility for certainty on both sides of the table.
How a Locked Box Works
The buyer prices the deal by taking enterprise value, then subtracting net debt and adjusting for working capital as they stand on the locked box date, producing a fixed equity number written into the purchase agreement. Because the seller keeps running the company until closing, the agreement prohibits leakage, meaning any value extraction such as dividends, management fees paid to the seller, or non-arm's-length transactions with seller affiliates. Any leakage that occurs must be repaid to the buyer dollar-for-dollar.
The contract also defines permitted leakage, a negotiated list of payments the seller may still make, such as ordinary-course salaries or a specified pre-closing dividend. Since the buyer receives the profits generated after the locked box date, sellers commonly negotiate a value accrual, often called a ticking fee, that adds interest or a daily profit charge to the price for the period between the locked box date and closing.
Locked Box Versus Completion Accounts
Sellers generally favor the locked box because it delivers price certainty at signing, avoids months of post-closing true-up disputes, and lets auction bids be compared on identical terms. Private equity sellers in European auctions use it heavily for exactly these reasons. Buyers accept it when the locked box accounts are recent and audited, since their protection depends entirely on the quality of that historical balance sheet plus the leakage covenants.
The mechanism suits stable businesses with predictable working capital and clean reporting, and it is riskier for volatile or carve-out situations where the balance sheet may shift materially before closing. US practice still leans toward completion accounts with a working capital peg, so candidates interviewing for cross-border M&A roles benefit from being able to compare the two regimes and explain when each protects which party.
