Meaning
A pricing method used in corporate acquisitions where the purchase price is determined and fixed based on a historical balance sheet prior to the signing of the agreement. Once this date is set, the risk and reward of the business performance transfers to the buyer. The use of a lock box mechanism avoids the need for post closing adjustments to the purchase price.
Value Protection
The seller is prohibited from extracting value from the company during the period between the lock box date and the actual closing of the transaction. This protection is managed by explicit leakage clauses. These clauses define what distributions are permitted and which ones must be repaid to the buyer.
Interest Compensation
To compensate the seller, the agreement often includes a provision for interest on the purchase price. This interest runs from the locked box date to the closing date.
Acquisition Execution
This approach is highly favored in auction processes and secondary buyouts because it provides high price certainty to both parties. The buyer knows the exact cash outlay required, while the seller can distribute the proceeds immediately without holding back funds in escrow. It simplifies the transition of ownership by removing the complex accounting disputes that frequently follow the closing of a transaction.
