Locked box vs completion accounts, explained simply
Under a locked box the seller undertakes not to extract value from the business after the reference date; payments to the seller or related parties after that date, known as leakage, are prohibited unless agreed in advance. Under completion accounts, the price is estimated and settled once real closing figures are known. The US working capital true-up is a form of completion accounts.
Locked box is common in the UK and Europe and gives price certainty. Completion accounts are the norm in the US.
Locked box timeline
IllustrativeA European subsidiary acquired by a UK buyer
The seller receives a daily ticker for the period between the locked box date and closing, in return for the profits earned for the buyer.
Comparison
| Locked box | Completion accounts | |
|---|---|---|
| Price certainty | Fixed at signing | Adjusted after closing |
| Risk after the balance sheet date | Buyer | Seller |
| Main protection | No leakage to the seller | True-up of cash, debt and working capital |
| Post-closing disputes | Fewer | More common |
| Common in | UK and Europe | United States |
| Diligence focus | The locked box balance sheet, in detail | Definitions and the peg |
Why it matters in a deal
The mechanism determines which balance sheet diligence must test most closely, and how much the parties will dispute after closing.
Red flags
- A locked box balance sheet that is unaudited or old
- Weak leakage definitions
- A long gap between the locked box date and closing