The Locked Box Fixes the Price and Forbids Leakage
A company keeps trading in the months between agreeing a sale and completing it, and its value keeps moving. The parties choose in advance whether to true up afterward or to fix the price at an earlier date and allocate everything since.
The Gap Nobody Can Avoid
An acquisition agreement is signed in March and completes in July, because regulatory clearance, financing, and consents take time. During those four months the target keeps operating. It generates cash, pays suppliers, collects receivables, and its net debt and working capital change every day.
The price was negotiated on financial statements that are already historical. So the parties must agree a mechanism deciding whose economic gain or loss the intervening period represents.
Two mechanisms dominate, and the choice between them is one of the more consequential commercial terms in a deal.
The Familiar Answer Adjusts Afterward
The traditional mechanism is completion accounts: agree an enterprise value, pay an estimate at closing, then prepare accounts showing the target actual net debt and working capital on the closing date and true up in whichever direction the final numbers require. The seller owns the business until closing and is paid for what it delivers on that date.
The Locked Box Fixes the Price Earlier
Under a locked box, the price is fixed by reference to a historical balance sheet, the locked box date, which may be several months before signing. There is no adjustment afterward.
From that date forward the economic risk and benefit of the business belong to the buyer, even though legal ownership transfers later. To make that workable, the agreement prohibits leakage, meaning any value flowing out of the target to the seller after the locked box date, and the seller indemnifies the buyer for any that occurs.
Permitted leakage, typically ordinary course items agreed in advance, is carved out. Everything else, including dividends, management fees to the seller, bonuses, and non arm length transactions, is prohibited and recoverable pound for pound.
| Completion Accounts | Locked Box | |
|---|---|---|
| Price certain at signing | No | Yes |
| Economic risk between the reference date and closing | Seller | Buyer |
| Post closing process | Preparation and possible dispute | None |
| Protection mechanism | The adjustment itself | Leakage covenant and indemnity |
| Common in | United States, bilateral deals | Europe, auction processes |
Completion accounts protect the buyer from paying for value that left the business. A locked box protects the seller from an argument about accounting policy conducted after it has lost control of the accounting records. Each mechanism defends the party most likely to be disadvantaged by the other.
Why Sellers Prefer the Locked Box
Three reasons, and they are practical rather than theoretical.
Price certainty. The seller knows exactly what it will receive at signing, which matters enormously for a private equity seller distributing proceeds to investors or a corporate seller committing to a use of proceeds.
No post closing dispute. Completion accounts disputes are common and expensive, because the adjustment depends on accounting judgements applied to a balance sheet prepared by the buyer, using the target records, after the seller has left. Working capital definitions, provisioning levels, and cut off treatment are all contestable, and the seller is arguing from outside the building.
Auction dynamics. In a competitive process a seller can impose a locked box because bidders compete on other terms. This is why the mechanism became standard in European auctions.
Why Buyers Push Back
The buyer objection is straightforward: it is buying a business based on a balance sheet that may be months old, with no adjustment for what actually happened, and its only protection is a covenant against value extraction.
That covenant does not protect against ordinary operating deterioration. If the business simply performs badly between the locked box date and closing, generating less cash than expected, the buyer bears it entirely and has no remedy, because nothing leaked. It just underperformed.
Buyers therefore demand thorough diligence on the locked box balance sheet, tight leakage definitions, and sometimes an interest charge running from the locked box date to closing to compensate for the delay in receiving the business.
The Interest Mechanism
That last point is worth explaining because it is frequently misunderstood. Since the buyer owns the economics from the locked box date but pays at closing, the seller has been out of its money for the intervening period while the buyer has enjoyed the cash generation.
Deals typically resolve this with a daily interest amount added to the price from the locked box date to completion, negotiated as a rate or a fixed daily figure. Where the target generates cash strongly, that number is a meaningful negotiation in itself, and it is effectively a proxy for expected cash generation during the gap.
How to Choose
The decision usually follows the facts rather than preference. A locked box works where recent audited or reviewed accounts exist, the business is stable and predictable, and the gap to closing is short. Completion accounts work better where the reference accounts are stale or unreliable, the business is volatile or seasonal, the closing timetable is long or uncertain, or the target is being carved out of a group and standalone accounts do not yet exist.
That last case is decisive in practice. A carve out has no clean historical balance sheet to lock, so the mechanism is chosen for you.
The Bottom Line
Locked box and completion accounts answer the same question and allocate the intervening risk to opposite parties. The locked box buys certainty and removes the post closing dispute at the cost of the buyer accepting operating risk it cannot control. Completion accounts preserve accuracy at the cost of a process the seller must argue from outside. Neither is more sophisticated than the other, and the right choice is usually dictated by whether the target has a clean, recent balance sheet worth locking.