Locked Box Agreement

A locked box agreement is a contractual agreement between parties in a business transaction that specifies a fixed price for the acquisition of the target company at a set date. This agreement is commonly used in mergers and acquisitions (M&A) and is becoming increasingly popular.

Under a locked box agreement, the seller`s financial statements are “locked” at a certain date, usually a few months before the transaction is completed. The buyer is then given access to these historical financial statements and can use them to assess the value of the target company.

The locked box mechanism is often used in conjunction with completion account mechanisms to calculate the purchase price of the target company. Completion accounts require the buyer and seller to agree on the value of the target company at the completion date, and any difference between the completion date value and the locked box value will be adjusted in the purchase price.

One of the benefits of a locked box agreement is that it can reduce the risk of post-closing adjustments, which can be time-consuming and costly. It also provides more certainty for both parties and can speed up the M&A process.

However, locked box agreements also have their drawbacks. The seller may be inclined to inflate the locked box value by taking actions that will boost the company`s financial performance in the time leading up to the locked box date. This can lead to the buyer overpaying for the target company. Additionally, the buyer may face difficulties in accessing and verifying the financial information provided by the seller.

As a professional, it`s important to note that locked box agreements can be advantageous to both parties in an M&A transaction. It`s essential to understand the purposes and potential pitfalls of this type of agreement before incorporating it in a business deal. When considering a locked box agreement, engaging experienced legal counsel is a must.