Locked box accounts

Helen Mather, Partner

Introduction 

The purchase price is of fundamental importance to any share sale or purchase, there must be a willing buyer and a willing seller both of whom are “happy” (or equally unhappy) with what is being paid. 

A locked box is a mechanism through which the price is based on a balance sheet (the “locked box accounts”) drawn up and agreed by the parties before completion (the “locked box date”). 

Locked box accounts v completion accounts 

A locked box mechanism sets the purchase price based on historical financial information and there is no post-completion adjustment to the price; whereas the alternative completion accounts mechanism establishes the purchase price by reference to the financial position of the business as at completion, with a post completion accounting exercise. 

Key features of a locked box accounts mechanism, and associated matters to consider are: 

1. Certainty as to the price: a locked box structure delivers price certainty as both parties know exactly what the price is when the deal is signed which is attractive both to the sellers (who know there can be no nasty surprises for them following completion) and also for the buyer, who can draw a line under the deal process at completion and straight away focus fully on running the business.  
2. A simpler process: whilst the buyer may well want to carry out more extensive financial due diligence for a locked box transaction to make sure it is comfortable with the locked box accounts and price agreed, overall the process is usually more straightforward and the share purchase agreement reflects this, with costs generally being lower.  
3. Associated sale terms: the seller(s) usually provides warranties to the buyer confirming that the locked box accounts are accurate and an indemnity that there has been no ”leakage” from the locked box date to completion through payments to the seller(s) or connected parties unless specifically agreed (“permitted leakage”). 
4. Risk: the economic upside or downside in the target business is for the account of the buyer from the locked box date. 
5. Interest: the seller(s) will therefore not have the benefit of the business’ profits from the locked box date and so the buyer may agree to pay interest or a daily profit charge in respect of the period from the locked box date to completion. 

The use of locked boxes have long been favoured by sellers given the certainty on the purchase price and they are often commonplace in a seller-friendly market. They can however take some time to agree and slow down a deal. 

We can guide you through the legal aspects of the process of a company or business sale and purchase including the pricing mechanics.  

Please contact a member of our corporate team on 0161 832 3434 if you’d like any help.