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Inside the Locked Box - EY - Global

Inside the Locked Box

What is a Locked Box?

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The classical versus Locked Box approach



The Locked Box frees up management time, reduces costs and minimizes uncertainty.

Executives planning and executing deals continue to operate in a volatile and complex business environment. Even after careful due diligence and a detailed sale and purchase agreement, the final stage can seem endless and often concludes with one party feeling they have left significant value on the table.


Boardroom issues
  • Are you considering an acquisition or divestment in the short-to-medium term?
  • Could your transaction be subject to unexpected value leakage (e.g., carve-outs) or face difficulty in accurately defining the Locked Box balance sheet?
  • What is the quality and availability of financial information for the target?
  • For both buyers and sellers, is there a risk, or heightened concern, for nasty surprises, leading to unexpected value erosion post completion?
  • For both buyers and sellers, does your dedicated transaction leader have prior experience of the benefits and alternative requirements to successfully navigate through a Locked Box approach?

The classical approach

Typically, an equity purchase price is agreed at signing and paid at completion. This is often based on a multiple of EBITDA or discounted cash-flow valuation, minus net debt, adjusted for working capital and other factors, and based on the balance sheet at completion.

Some challenges with this approach are:

  • Between signing the agreement and completing the transaction, the value of the business is likely to change. There will usually be differences between forecast and actual net debt and working capital.
  • A true-up process post completion to agree changes to the purchase price is often disputed, which can consume a great deal of management time.
  • It delays the point at which the final price for the target business is agreed.
  • The true-up phase adds further complexity to the sale and purchase agreement, as both buyer and seller will push for clauses and definitions likely to strengthen their negotiating hand. There can be extra costs associated with these negotiations.
  • Often, value can be lost in such processes.

A useful alternative

The “Locked Box” mechanism, an alternative to the deal completion phase, can speed up and simplify deal completion by:

  • Providing greater certainty over the price that needs to be paid for a target business on completion, which for the seller frees up capital for reinvestment.
  • Removing the need for a post-completion “true-up” process.

How it works

In a Locked Box transaction, the equity price is calculated based on a defined historical balance sheet date agreed by the parties — the “Locked Box date” — and this price does not change. However the buyer needs to compensate the seller for expected changes in net debt between the Locked Box date and completion (the value accrual).

There is no provision in the sale and purchase agreement for any adjustment or net debt true-up on or after completion (although there may be claims under warranties). From the Locked Box date onwards any economic risks or rewards flowing from the target’s performance effectively pass to the buyer.

The buyer will need reassurance that:

  • The Locked Box is firmly locked — they must have recourse for any leakage
  • The financial information they have about the business must be complete and accurate enough for them to calculate an equity price, including an estimate for a value accrual


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