What is Locked Box?
Short answer: A locked box is a purchase-price mechanism that uses accounts at a date before signing to determine the equity-value bridge. The amount is normally fixed at signing, subject mainly to leakage protection rather than post-completion accounts.
The locked-box date creates the financial reference point from which the seller promises that value has not been extracted for shareholders or related parties except for specifically permitted items. Ordinary trading continues for the buyer's economic benefit, although legal ownership transfers only at completion. This differs from completion accounts, which measure agreed balances at or after completion and then adjust the price. A locked box can give sellers greater certainty and reduce post-close disputes, but the buyer relies heavily on the quality of the locked-box accounts, financial diligence and enforceable leakage covenants.
How it works
The parties agree the reference accounts, accounting policies, enterprise-to-equity bridge and definitions of leakage and permitted leakage. Leakage may include dividends, shareholder payments, related-party fees, asset transfers below value, transaction bonuses or liabilities paid for sellers, depending on drafting. Permitted leakage is listed precisely and may be reflected in the agreed value. The seller gives undertakings for the period to completion and provides a claims process. Some deals include a value accrual amount for the buyer's use of the seller's capital during that period. Common mistakes are relying on management accounts that were not prepared for this purpose, leaving related parties undefined and treating every ordinary-course payment as permitted without limits.
Illustrative equity value = enterprise value - locked-box debt and debt-like items + locked-box eligible cash - agreed leakage after the locked-box date + any expressly agreed value accrual
Example
At the locked-box date, enterprise value is 100, defined debt is 22 and eligible cash is 5, producing equity value of 83. Before completion, the company pays 1.5 to a seller affiliate for a historic advisory fee that was not listed as permitted leakage. It also pays regular employee salaries and 0.4 of specifically permitted property rent to another affiliate. Under the agreed definitions, the salaries and listed rent do not reduce the fixed amount, but the 1.5 unauthorised payment is repayable. The buyer still investigates whether the fee was disclosed and whether any related tax or accounting entries create separate consequences.
Why it matters
Sellers use a locked box to know expected proceeds at signing and avoid preparing disputed completion accounts after control has passed. Buyers and private-investment teams use it when reliable historical accounts and diligence support confidence in the bridge. Boards assess whether the period to completion, financial controls and seller covenant strength make the mechanism appropriate. Lenders need the same debt and cash definitions reflected in sources and uses. The choice should reflect information quality and bargaining position rather than a belief that one mechanism is universally superior.
Accounting standards do not define the commercial term locked box, so the agreement is decisive. Tax payments, intra-group balances, transaction costs, bonuses and dividends can be classified differently across deals. Insolvency, unlawful-distribution and directors' duties may limit payments regardless of contractual permission. Long signing-to-completion periods increase monitoring risk, and public or regulated transactions may impose additional conduct rules. Counsel and financial advisers should test the accounts, definitions, remedies and evidence needed for a claim.