Locked box

The locked box mechanism is a price-setting approach in which equity value is fixed definitively at a historical balance sheet date (the locked-box date), eliminating post-closing price adjustments. Unlike completion accounts, there is no closing adjustment: the buyer bears the economic risk and benefit of the target from the locked-box date, in exchange for full protection against leakage. By freezing the financial reference point, the mechanism secures the equity price against post-signing changes in the target's net debt or working capital. The SPA defines exhaustively what constitutes permitted leakage (pre-agreed distributions) and prohibited leakage (any other value extraction), the latter being recoverable from the seller on a euro-for-euro basis. The locked box provides price certainty from signing, simplifies closing mechanics and is the preferred mechanism in competitive sales processes and PE-to-PE transactions.

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Example: in a CHF 20.0 million locked-box acquisition with a 31 December lock date, the buyer accepts the fixed price regardless of working capital or cash movements between January and the March closing. In exchange, the seller warrants zero leakage during this period; a ticking fee of 5% p.a. (CHF 250,000 for the 3-month period) compensates the seller between lock date and closing, reflecting the economic risk transfer to the buyer. In a comparable PE-to-PE transaction, the SPA defines permitted leakage of CHF 200,000 (an agreed management fee payable to the seller's group in January); a CHF 150,000 dividend paid by error in February constitutes prohibited leakage, triggering a contractual obligation to reimburse the buyer at closing.

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Hectelion advises on locked-box vs completion accounts selection, ticking fee calibration and permitted leakage structuring, and negotiates leakage definitions to protect clients' economic interests from signing through closing.

The choice between a locked box and completion accounts is negotiated as early as the letter of intent: Hectelion supports sellers and buyers from negotiation to closing.