What it means
A locked box fixes an agreed equity purchase price using accounts from a specified earlier date, called the locked-box date, instead of adjusting the price after completion. The buyer and seller settle the price before signing rather than using completion-day accounts to true it up afterwards.
Both sides therefore need confidence in the historical balance sheet, because later routine changes in cash, debt and working capital generally do not trigger a normal completion-account recalculation, and the sale contract still governs any other claims. The locked-box date is the financial reference point, not the date the buyer legally receives the shares.
From that date, the buyer usually receives the economic upside and bears ordinary business downside until completion, even while the seller still runs the target. A seller may negotiate compensation for that interval, sometimes called a ticker or ticking fee, and its amount and basis are deal-specific, not automatic interest on the purchase price.
Leakage is value transferred from the target to the seller or its affiliates after the locked-box date that was not allowed in the price, such as a dividend, unusual fee, related-party payment or forgiven debt, depending on the contract. The buyer normally seeks a covenant against leakage and a way to recover it.
Ordinary trading costs are not automatically leakage merely because cash went out, so the definitions and exceptions need precision. Suppose the contract provides an agreed equity price of $12 million, a separate $150,000 ticker and $50,000 of proven non-permitted leakage that is deducted at completion.
The arithmetic gives $12.1 million payable under those assumptions. In another contract, the $50,000 might be repaid through a separate claim after closing rather than deducted from the closing wire, so use the actual payment and claim terms because a generic formula cannot settle the mechanics.
A completion-accounts deal works differently, often setting a provisional price and recalculating it after closing using agreed definitions of cash, debt and working capital at completion. That may track the later financial position more closely but introduces a settlement and dispute process, whereas a locked box reduces this class of post-closing true-up yet can still have leakage or warranty disputes.
It does not mean the price can never change for any reason. Recent, reliable accounts are a practical requirement, so review whether receivables are collectible, liabilities complete, cash restricted and inventory valued consistently.
A long gap from the locked-box date to closing increases the importance of interim reporting and conduct covenants. The buyer may lack the chance to reprice a fall in ordinary trading, so it must decide whether the fixed price compensates for that risk.
In practice
Real-world examples.
Example
A company share sale uses audited accounts at a year-end reference date to fix its agreed equity price. The buyer spends its diligence time testing those accounts rather than preparing for a completion-day count. Both sides know the headline price before they sign.
Example
A seller repays an unpermitted post-reference-date dividend under the contract leakage rules. The dividend was not on the schedule of permitted payments, so the buyer claims it back dollar for dollar. The repayment restores the value the price assumed was still in the company.
Example
A buyer agrees an explicit ticker to compensate the seller for the period before completion. The seller argues that it has run the business for the buyer's benefit since the reference date. The parties record the rate and the period in the contract rather than leaving it to interpretation.
Formula
Calculation
Illustrative closing payment under a specified contract = agreed equity price + agreed ticker - non-permitted leakage deducted at closing. $12,000,000 + $150,000 - $50,000 = $12,100,000; another contract may handle leakage separately.
If the parties agree a ticker of 1.5% a year on the $12,000,000 equity price for the 10 months between the locked-box date and completion, the ticker is $12,000,000 x 1.5% x 10 / 12 = $150,000, which matches the figure above. Where the contract instead lets the buyer recover leakage after closing, the closing payment is $12,150,000 and the seller later repays $50,000, leaving a net $12,100,000.Case study
Seen in the real world.
This illustrative and entirely fictional example follows Crescent Software, an invented seller seeking a clear exit price. The buyer reviews year-end locked-box accounts, agrees the equity value and schedules permitted management payments. Before completion, an affiliate receives an unlisted payment. The parties assess it under the leakage clause and settle the specified amount without preparing general completion accounts.
The fictional outcome illustrates monitoring, not a promise that locked-box deals have no disputes. The founder wanted price certainty and the buyer accepted it because the accounts were audited and the leakage clause was precise. The buyer's finance team still reviewed management accounts every month between the locked-box date and completion. That routine check is how the unlisted payment was found in time.
Watch out
Common mistakes.
- Using stale or unreliable reference accounts without enough diligence.
- Failing to define permitted and prohibited payments to sellers and affiliates.
- Assuming a fixed price eliminates every leakage, warranty or other contractual claim.
Questions
People also ask.
What is a locked box?
An agreed equity price based on accounts at an earlier date, usually without a later completion-accounts adjustment.
What is leakage?
An unpermitted transfer of value from the target to the seller or its affiliates after the locked-box date.
Why use it?
It can reduce ordinary post-completion price recalculations, provided buyers trust the reference accounts and leakage protection.
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