TLDR:
Locked Box is a fixed-price closing mechanism in M&A transactions where the purchase price is finalized at signing based on a pre-signing reference balance sheet, with no post-closing working capital adjustment. The buyer assumes risk of changes between the reference date (effective date) and closing, while protections against “leakage” prevent the seller from extracting value during this period. Locked Box has become standard in European M&A but remains less common in the US.
How Locked Box Works
The seller and buyer agree on a Reference Balance Sheet at a specific date (often year-end or quarter-end) and a final fixed purchase price based on that balance sheet. The seller continues to operate the business between reference date and closing, retaining cash flows and bearing operating risks—the “locked box” period. Leakage prohibitions prevent specific value transfers from target to seller during this period: dividends, related-party payments, executive bonuses beyond ordinary course, intellectual property transfers, or other “value leakage.” Any leakage is repaid to the buyer pound-for-pound (or “ticking fee” interest may be paid to seller for the period).
Locked Box vs. Completion Accounts
The traditional alternative is “Completion Accounts” (also called Closing Accounts) where actual closing-date balance sheet is prepared post-closing and working capital, debt, and similar items are trued-up to agreed targets. Locked Box advantages: certainty of price for both parties, no post-closing accounting disputes, faster path to closing on accounting issues, simpler structure. Locked Box disadvantages: buyer takes risk on changes between reference date and closing (mitigated by leakage protection and operating covenants), requires high-quality reference accounts (any errors are baked in), and may discourage longer signing-to-closing periods that benefit buyer due diligence.
When Locked Box Works Best
Locked Box is most effective when: the reference accounts are recent (typically 1-6 months before signing), audited or near-audit quality, the business is stable with predictable performance, the signing-to-closing period is short (under 3 months), and the seller is committed to running the business in ordinary course. PE sellers prefer locked box for exit certainty; sophisticated buyers may resist for working-capital risk-allocation reasons. Turkish M&A practice has historically used completion accounts but locked box is increasingly common, particularly in PE-backed sale processes.