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What is a Locked Box?

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Used in a sentence

The Daily Ledger · Markets

The sellers insisted on a locked box priced off the December accounts, taking any post-closing adjustment off the table.

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Explained in three depths

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Overview

A locked box is a way of pricing a company sale in which buyer and seller fix the final price on a set of accounts from an agreed past date, the locked-box date, and rule out any adjustment afterwards. From that date the profits belong to the buyer, even though the seller keeps running the business until the handover. The contract protects the buyer by banning extraordinary payments out to the seller in between, and whatever slips through, the seller repays.
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Overview

A locked box is a company sale priced on the accounts as they stood at some agreed date in the past, final, no adjusting later. Everything the business earns after that date already belongs to the buyer, even while the seller is still the one showing up and running it. The obvious problem is the seller quietly paying themselves on the way out. The contract bans exactly that, and any banned payment that slips out comes straight off what the seller keeps. 😎

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Detail

A locked box fixes the final price of a company on accounts drawn up at a past date, with both sides agreeing that no adjustment follows. The accounts are usually audited, and the buyer does its checking before signing, since there is no scope to correct the price later. The alternative it replaces is settling up after the handover through price adjustments, with the net working capital adjustment among the main ones. A locked box trades that late precision for certainty: both sides know the final number on the day they sign. The risk is that the seller could pull value out of the business between the locked-box date and the handover, when the price cannot move and the profits already belong, economically, to the buyer. So the contract bars leakage, meaning extraordinary value flowing out to the seller in that window: special dividends, one-off bonuses, above-market management fees. Whatever leaks, the seller repays in full. Normal running costs, and payments the contract names in advance, count as permitted leakage and carry on. In return for minding the business through the gap, the seller usually collects a ticker, a daily interest or profit charge added to the price. Sellers like locked boxes for the certainty, and buyers accept them most readily where the accounts are solid and the business is steady.
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Detail

A locked box is a deal priced on a snapshot. Pick a date, take the audited accounts from that date, agree the price, done. The profits still get counted, and they belong to the buyer. What nobody does is recount to move the price, which is exactly the arguing this structure exists to skip. So the buyer's protection has to happen before signing, in checking the numbers hard, because afterwards the price cannot be fixed. The seller's job afterward is stranger, running a business whose profits already belong to somebody else. That is where the contract earns its keep. It lists what may leave the company, and everything extraordinary headed the seller's way, a special dividend, a farewell bonus, a suddenly generous fee, gets repaid in full. The seller does collect a small daily charge for the babysitting. Sellers love the structure because the number is the number, agreed in the signed contract and immune to a bad quarter in the gap. Buyers sign up when the accounts are clean enough to trust, which is why the audit matters more here than anywhere. 😎

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Analogy

A farmer sells a field of standing wheat in May. The buyer walks the field with the farmer, and the two agree a price on how the crop stands that day, with collection at harvest. Everything the field grows from that walk onward already belongs to the buyer at the agreed price. The farmer keeps tending the crop through the summer, and the one firm rule is no cutting: not a sheaf leaves the field for the farmer's own barn. For the months of tending, the buyer pays the farmer a little for the keeping. The crop was priced on the day of the walk, and harvest day changes nothing about it.
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Analogy

Paying for a beehive in April at a price agreed on that day's inspection, collecting it in July. Every drop of honey the bees make in between is already yours, which the bees do not know and the seller has to remember. The seller keeps feeding and checking the hive, takes not one jar for themselves, and charges you a little for the minding. Your caution all happened in April, poking through the frames, because July brings no second look at the price. The hive hands over whatever it holds, and the number on the invoice is the April number. 😎
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AI explanations may contain errors · Not professional advice

Formal definition — The same term, explained the usual way

A locked box is a purchase price mechanism in private acquisitions under which the equity value is fixed by reference to a historical balance sheet drawn up at an agreed date, the locked box date, with no post-completion adjustment. Economic ownership passes to the purchaser from that date. The seller covenants against leakage, being value extracted by or for the benefit of the seller after the locked box date, other than permitted leakage defined in the agreement, and undertakes to restore any leakage on a dollar-for-dollar basis. The purchaser commonly compensates the seller for the period to completion by way of a ticker, an agreed daily amount or interest charge. The mechanism contrasts with completion accounts, under which the price is trued up after closing.

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