If you`re involved in a business acquisition, you may have heard the phrase “locked box” in reference to the sale and purchase agreement. But what does it mean, and how does it impact the deal?
A locked box is a mechanism used in M&A deals to value the target company. Essentially, it involves the seller providing the buyer with a financial snapshot of the company at a certain point in time (the “locked box date”), which the buyer can then use to calculate the purchase price. This is different from a completion accounts mechanism, where the purchase price is based on the actual financial performance of the company post-acquisition.
So why might a seller use a locked box mechanism? One main advantage is certainty – the seller knows exactly how much they will receive for the company, regardless of any fluctuations in performance between the locked box date and completion. This can be particularly attractive if the seller is looking for quick and clean exit or wants to avoid any contentious post-closing negotiations.
However, there are also downsides for the seller. By setting the price based on a historical figure, they may be leaving money on the table if the company has performed well in the interim. On the other hand, if the company has underperformed, the buyer may feel like they`re overpaying – which could lead to issues around price renegotiation or even deal collapse.
For the buyer, a locked box mechanism can be beneficial if they`re looking for a straightforward pricing mechanism that doesn`t require ongoing calculations or negotiations. However, they also need to carefully consider the locked box date – if it`s too far in the past, it may not accurately reflect the company`s current value; too close to completion, and there`s a risk of the company`s performance changing significantly in the interim.
Ultimately, whether or not to use a locked box mechanism in a sale and purchase agreement will depend on the specific circumstances of the deal, as well as the preferences and objectives of both parties. As with any M&A transaction, it`s important to carefully consider all available options to ensure the best outcome for both parties.