Locked box

If completion accounts are the “pay now, adjust later” mechanism, the locked box is the “fix the price and do not touch it” approach. It is an increasingly popular alternative in Europe that offers price certainty in exchange for greater discipline during the period between signing and closing.

What is a locked box

A locked box is a pricing mechanism in M&A where:

1. A reference date prior to closing is chosen (usually the date of the last audited financial statements or a quarter end).
2. The Equity Value is calculated based on the accounts at that reference date (net debt, working capital, etc.).
3. The price is fixed at the signing of the SPA. There is no post-closing adjustment.
4. In exchange, the seller warrants that between the reference date and closing no value has been extracted from the company (no leakage).

The “box is locked” from the reference date: all value generated by the company from that date belongs economically to the buyer.

The concept of leakage

Leakage is the central element of the locked box. It consists of value extractions that the SPA prohibits between the reference date and closing:

Prohibited leakage (examples):

• Dividends or distributions to shareholders
• Extraordinary bonuses or compensation to executives related to the seller
• Payments to seller-related parties outside market conditions
• Repayment of the seller’s debts using company funds
• Asset sales at below-market prices
• Unnecessary services from related parties

Permitted leakage:

• Normal payments in the ordinary course of business (payroll, suppliers)
• Specific payments identified and approved by the buyer
• Ordinary taxes

If prohibited leakage occurs, the seller must indemnify the buyer euro for euro. This obligation is usually backed by a limited holdback or a specific escrow.

How it works step by step

1. Selection of reference date. The parties agree on a date (e.g., 31 December of the previous year).
2. Preparation of reference accounts. A balance sheet is prepared at the reference date using the same accounting policies that would apply in completion accounts.
3. Calculation of Equity Value. Enterprise Value minus net debt at the reference date, plus/minus working capital adjustment.
4. Signing of SPA with fixed price. The price is fixed and does not change. The buyer assumes economic risk from the reference date.
5. Period between signing and closing. The seller manages the company in the ordinary course and commits to no leakage. The buyer may request periodic information.
6. Closing. Shares are transferred and the fixed price is paid. There is no subsequent adjustment.

Locked box vs. completion accounts

The locked box offers the seller price certainty (they know exactly how much they will receive from signing), but requires discipline (they cannot extract value between the reference date and closing). For the buyer, the advantage is post-closing simplicity (no need to prepare closing accounts or arbitrate disputes), but they assume the risk that the company’s financial situation deteriorates between the reference date and closing.

When to choose a locked box

• Auction processes. In competitive processes, the seller prefers locked box because it offers price certainty and reduces disputes.
• PE sellers. Private equity funds divesting prefer locked box because it allows them to calculate returns precisely and distribute funds quickly.
• Companies with robust financial information. The locked box requires reliable reference accounts. If the accounting is weak, completion accounts are safer.
• Short signing-to-closing gap. The shorter the period, the lower the risk for the buyer.

A practical example

A venture capital fund sells a medical technology company in Spain. The reference accounts are as at 31 December 2025. The SPA is signed on 15 February 2026 and closing occurs on 15 April 2026.

Reference accounts (31/12/2025):

• Agreed Enterprise Value: 40M
• Net debt: -4.5M
• Working capital vs. normalised: +0.3M
• Equity Value (fixed price): 35.8M

Between the reference date and closing, the seller:

• Does not distribute dividends
• Maintains payroll and ordinary payments
• Does not make any payments to related parties outside the ordinary course

At closing, the buyer pays 35.8 million. There is no subsequent adjustment. If it were later discovered that the seller paid a 200,000 euro bonus to a related executive between January and April (prohibited leakage), the seller would indemnify those 200,000 euros.

Frequently asked questions

What is leakage in a locked box?

Value extractions by the seller between the reference date and closing. The SPA exhaustively defines what constitutes prohibited leakage (dividends, related-party payments) and what payments are permitted (ordinary course of business).

Who prefers the locked box?

Generally the seller, because it provides total price certainty. The buyer accepts the locked box when financial information is robust, the signing-to-closing gap is short, and the risk of deterioration is low.

Can a locked box be combined with escrow?

Yes. The locked box eliminates the price adjustment, but it can be combined with an escrow or W&I insurance to cover representations and warranties risks.

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