Glossary · Deal structure

Locked box mechanism

Locked box fixes the purchase price at a reference date (typically the most recent year-end): all cash + working capital movements from that date accrue to the buyer, with "permitted leakage" clauses blocking abnormal extractions.

Definition

In a locked box the balance sheet is "locked" at the reference date: the price is fixed against that snapshot and all cash flows from that moment accrue to the buyer, not via a later completion adjustment. The seller cannot make exceptional dividends, bonuses, or intercompany payments: these are "leakage" and must be refunded.

The alternative, completion accounts, measures working capital and cash on the actual closing date and cash-settles deviations against the working-capital peg. Locked box is faster and simpler post-closing but requires more preparation (strong balance-sheet validation); completion accounts gives more post-closing flexibility but extends the process by 4-8 weeks of working-capital determination. Locked box has gained share in Benelux M&A since 2020: roughly 40% of mid-market deals now run on locked box.

When it matters

For deals where seller and buyer want a fast closing and a strong reference-date balance sheet can be presented (audited accounts, no open disputes). For unstable businesses, fast-growing companies, or dossiers with material working-capital volatility, completion accounts remains safer for both sides.

Read: completion accounts vs locked box

Frequently asked

What is "permitted leakage"?: A list of extractions the seller may still make between reference date and closing: typically salaries, contractual bonuses per fixed formulas, and normal operating expenses. Anything beyond (exceptional dividend, intercompany transfer, off-market retainer) is "leakage" and must be compensated.
Is locked box always faster than completion accounts?: Yes in the post-closing phase (no 60-90 days of working-capital determination). But preparation is longer because the reference-date balance must be extremely thoroughly validated. Net, locked box typically saves 2-4 weeks on well-prepared deals.
What risks does locked box carry for the seller?: Between reference date and closing you bear all cash effects without compensation. If operating performance disappoints in that window, you carry the damage. That's why a short gap between reference and closing (60-90 days max) matters: otherwise compensate in price.

Related terms

Working capital peg- The working capital peg is the normal level of net working capital: typically the…
Net working capital (NWC)- Net working capital is receivables + inventory − payables, excluding cash and debt: the…

Definition

When it matters

Frequently asked

What is "permitted leakage"?

A list of extractions the seller may still make between reference date and closing: typically salaries, contractual bonuses per fixed formulas, and normal operating expenses. Anything beyond (exceptional dividend, intercompany transfer, off-market retainer) is "leakage" and must be compensated.

Is locked box always faster than completion accounts?

Yes in the post-closing phase (no 60-90 days of working-capital determination). But preparation is longer because the reference-date balance must be extremely thoroughly validated. Net, locked box typically saves 2-4 weeks on well-prepared deals.

What risks does locked box carry for the seller?

Between reference date and closing you bear all cash effects without compensation. If operating performance disappoints in that window, you carry the damage. That's why a short gap between reference and closing (60-90 days max) matters: otherwise compensate in price.