Locked box
With this method of setting the purchase price, the resulting price is based on locked, usually audited financial statements, which significantly reduces the scope for disputes over accounting practices and adjustments to net debt and working capital items when setting the purchase price.
In its simplest form, the locked box method means a fixed purchased price for a company. The equity value is agreed in advance in the share purchase and sale agreement when signed. Based on the most recent available financial statements, the price of the business share is set at the agreed date (locked box), as the amount of cash, financial accounts, borrowings and loans and working capital items known at the agreed date. At the moment the financial statements are locked, the buyer acquires the right to all the economic benefits of the company. The share purchase and sale agreement also provides protection for the buyer against the stripping out of value from the company in the period between the date of locking the financial statements and the date of closing the transaction (“leakage”).
