We want complete certainty on our net cash at close without enduring a ninety-day post-closing working capital true-up dispute with the buyer. When is a locked box deal structure viable for a lower middle market company, and what covenants do we need to prevent value leakage?

Question

Tyler Smith · Accepted Answer

The traditional US closing accounts model subjects the seller to a stressful ninety-to-one-hundred-twenty-day post-closing net working capital true-up where buyers often challenge inventory reserves and accrued expenses. A locked box mechanism eliminates this post-close dispute by fixing the purchase price based on a balance sheet prepared at an agreed historical date, transferring balance sheet cash flow risk to the buyer from that date forward.

A locked box is viable only under specific operational conditions:

- Financial Discipline: Your company must have clean, monthly accrual accounting with documented historical cutoffs and minimal seasonal volatility. If your financials rely on year-end CPA adjustments, a buyer will reject a locked box immediately.

- Strong Competitive Tension: Buyers prefer closing accounts because it gives them a second bite at the valuation apple. You generally need multiple competing bidders to successfully demand a locked box structure.

To make a locked box work, the purchase agreement centers on defining and preventing value leakage between the locked box balance sheet date and closing. Unpermitted leakage must be returned to the buyer dollar for dollar, and typically includes:

- Owner dividend distributions or share redemptions.
- Management fees, transaction success bonuses, or above-market compensation adjustments.
- Waivers of intercompany receivables or unapproved corporate transfers.

Permitted leakage must be explicitly scheduled in the definitive agreement, such as normal-course executive salaries, agreed capital expenditures, and specified operational costs. If your leadership team maintains strict operational discipline using an EOS Scorecard to monitor working capital and operating cash daily, a locked box provides total closing price certainty without post-sale escrow clawbacks.