deal-structures
A locked box fixes the equity price from a historical balance sheet. The company is “locked”: value taken out after that date is leakage the seller must refund. There is no post-closing true-up of working capital.
European private equity popularised locked box because funds distributing to LPs hate a six-month argument about working capital. The parties pick a recent audited or management balance sheet (the box date), agree equity value from that position, and prohibit leakage — dividends, extraordinary management fees, asset transfers to affiliates — from then until closing. Permitted leakage is listed (ordinary-course salaries, agreed capex).
There is typically no completion accounts true-up. The buyer takes the risk that WC and cash move in the ordinary course. The seller takes the leakage covenant risk.
Because there is no true-up, financial due diligence on the box date accounts is existential. A missed debt-like item is gone. Buyers therefore demand a tighter QoE and a full net-debt schedule dated to the box.
Box date 31 December. Equity value €15.0m. Closing 30 April. In February the seller pays a €0.5m dividend. That is leakage; €0.5m comes off the closing funds flow (or is repaid). A €0.3m ordinary-course inventory build is not leakage; the buyer lives with it.
Sellers get certainty and keep ordinary profits after the box (the “benefit of the box”). Buyers get a cleaner closing and must underwrite the intervening period. Interest on equity value from box date to closing is sometimes added as a ticking fee.
A leakage definition that misses related-party cash. A stale box date (nine-month-old numbers). No access rights if leakage is suspected. Mixing locked box with a full WC adjustment and wondering why the SPA is contradictory.
Locked box is a poor fit if the business is highly seasonal and the box date is a trough or peak the buyer did not price. It also does not replace earnout if the real gap is the future.
Locked box only works if both sides trust the box-date financial position. That trust is cheaper when the position is a structured object, not a PDF pack assembled for the auction.