Meaning
Financial interest compensation clauses embedded in locked box pricing structures compensate equity sellers for cash generated by the business between the locked box date and transaction completion. Applying locked box interest provides sellers with a daily rate return on the agreed equity value in exchange for fixing the purchase price at an historical balance sheet date. Buyers agree to pay this daily interest charge because operational cash flows generated during the interim period remain inside the target entity for buyer benefit.
The calculation stops applying on the formal closing date when cash consideration transfers to the sellers.
Value Calculation
Purchase agreements express the daily compensation charge as a fixed percentage per annum applied to the enterprise valuation or equity value established at the locked box balance sheet date. The agreed rate often mirrors buyer borrowing costs or statutory commercial interest rates. Calculating locked box interest across an extended period between signing and completion increases total cash payable at closing.
If regulatory delays prolong the completion timeline, locked box interest continues to accrue unless contractually capped by negotiation.
Leakage Restriction
Sellers agree to strict covenants preventing value leakage to shareholders through dividends or advisory fees prior to closing. Permitted leakage items are explicitly defined in purchase documentation to preserve target cash reserves.
Buyer Protection
Buyers retain rights to deduct unpermitted leakage value directly from the final purchase price payable at completion. Indemnity provisions protect the buyer against undisclosed value extraction occurring before ownership transfers.
