Locked Box or Closing Accounts

How to choose the most appropriate pricing mechanism depending on cash generation, time to closing, and business stability.

The entrepreneur received the LOI and, within the economic section of the offer, read the following:

“The price will be 8.5x 2024 EBITDA, on a debt-free and normalized working-capital basis.
The pricing mechanism will be Locked Box, with an effective date of 12/31/2024 and no adjustments after closing.”

That part caught his attention and he decided to ask directly:

“What exactly is this Locked Box thing?”

And that’s where the conversation began.

The conversation

ENTREPRENEUR:
“What is this Locked Box? Are you buying the company in a sealed box, like a mystery gift?”

BUYER:
“Not exactly. Look: if we sign the letter of intent now in February, we make you an offer based on the balance sheet closed on December 31. That ‘snapshot’ is the basis of the price.
Then we do due diligence in March and April and, if everything fits, we close in May. But you already know the price today.”

ENTREPRENEUR:
“And there are no adjustments on closing day?”

BUYER:
“No. In a Locked Box, we do not recalculate net debt or working capital at closing. The price does not change. It’s a mechanism designed to avoid discussions in the final phase.”

ENTREPRENEUR:
“And what about the cash the company generates from January until closing?”

BUYER:
“In principle, that cash remains in the company. You continue managing normally, but without extracting value for yourself.”

ENTREPRENEUR:
“And if I want to take something out? A bonus, a dividend…”

BUYER:
“If we agree on it now and put it in writing, it can be done. That’s called permitted leakage: very specific exceptions we agree upon together.
But our proposal is that there be none — meaning nothing is extracted from the Locked Box date until closing.”

ENTREPRENEUR:
“And what if I take something out without telling you?”

BUYER:
“That would be improper leakage. And then it is deducted from the price euro-for-euro. We’re talking about unauthorized dividends, shareholder loans, personal payments…”

ENTREPRENEUR:
“So the cash generated before closing is captured by the buyer.”

BUYER:
“Correct. That is how the Locked Box works.”

Infographic: Locked Box vs. Closing Accounts. Advantages and disadvantages of each model.

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What is a Locked Box (without unnecessary complications)

The price is fixed using a historical balance sheet (e.g., 12/31/2024).
There are no adjustments at closing.
Cash generated between the Locked Box date and closing stays in the company (except agreed permitted leakage).

Advantages for the seller

Fixed price from the beginning.
Less friction and fewer accounting debates.
Faster and more predictable process.

Risks for the seller

If your company generates significant cash before closing, that value is captured by the buyer.
If a long time passes between the Locked Box date and closing, the price is based on an old snapshot.
If the business is improving month by month, you are not monetizing it.

What are Closing Accounts

The price is calculated using a balance sheet prepared on the actual closing date.
It reflects final net debt and working capital.
It allows the seller to capture all cash generated up to that day.

Advantages for the seller

You capture all pre-closing cash.
If you grow month by month, the price follows.
It is fairer when signing → closing takes longer.

Disadvantages

Uncertainty: you don’t know the final price until closing.
More accounting work.
More room for technical discussions and disputes with the buyer.

From the seller’s perspective: how to really choose

The key question is:

How much value moves between the Locked Box date and closing?

If the answer is “a lot,” the Locked Box is clearly worse.
If the answer is “not much,” the Locked Box makes your life much easier.

A Locked Box works for you if:

Your company is stable and predictable.
The Locked Box date is close to signing.
You want price certainty.
You prefer less friction.
You need speed.

A Locked Box can hurt you if:

Your company generates significant cash between the Locked Box date and closing.
Closing takes place many months later.
You have positive seasonality in Q1 or Q2.
Your business is improving quarter by quarter.