Locked Box
A pricing mechanism where the purchase price is fixed at a historical date with no completion accounts adjustment.
Full Definition
A locked box is a purchase price mechanism where the equity value is fixed by reference to a set of accounts prepared at a historical date (the "locked box date"), with no post-completion price adjustment.
How it works: 1. Price fixed based on locked box accounts (e.g., last audited accounts) 2. Value "locked" at that date 3. Seller prohibited from extracting value post-locked box date 4. No completion accounts or price adjustment post-completion
Permitted vs prohibited leakage: Prohibited leakage (requires seller indemnity):
- Dividends or distributions
- Management fees or bonuses
- Repayment of shareholder loans
- Asset transfers at undervalue
- Non-arm's length transactions
Permitted leakage (agreed and priced):
- Normal course salary payments
- Ordinary course trading
- Pre-agreed distributions
Advantages:
- Price certainty for both parties
- Simpler, faster completion process
- No post-completion disputes
- Reduced transaction costs
Disadvantages:
- Buyer takes risk of value changes post-locked box date
- Requires high-quality locked box accounts
- Leakage protections need careful drafting
Locked box is increasingly popular in UK private equity transactions and competitive auction processes.
Related Terms
Completion Accounts
Financial statements prepared at completion to calculate final adjustments to the purchase price.
Purchase Price
The total consideration paid by the buyer to acquire the target business or its shares.
Equity Value
The value attributable to shareholders, calculated as Enterprise Value minus net debt and debt-like items.