Our M&A advisor suggests using a locked-box deal structure instead of a traditional post-closing net working capital true-up to avoid post-sale price adjustments. When does a locked-box mechanism make sense for a lower middle market company, and how do we protect against value leakage?

Question

Tyler Smith · Accepted Answer

In a traditional completion accounts deal, the purchase price is adjusted months after closing based on a post-closing working capital true-up. This process frequently sparks hostile disputes over peg calculations, inventory obsolescence, and bad debt reserves. A locked-box mechanism eliminates post-closing true-ups by setting a fixed equity purchase price based on a balance sheet audited prior to signing the purchase agreement.

A locked-box structure is advantageous when your company maintains reliable accounting controls, predictable cash flows, and short closing timelines. To deploy it safely, adhere to these operational principles:
- Establish a recent locked-box date. Set the reference balance sheet date as close to signing as possible, ideally within thirty to sixty days. The longer the interval between the balance sheet date and closing, the more complex the scrutiny over business cash flow becomes.
- Define permitted leakage versus value leakage explicitly. Value leakage refers to any cash or value transferred out of the business to the sellers between the locked-box date and closing. Permitted leakage must be contractually itemized down to the dollar, including owner market-rate salary, standard health benefits, and approved transaction advisory expenses.
- Charge a ticking fee for extended timelines. If the buyer requires regulatory approval or financing delays that postpone closing past a specified date, include a ticking fee (an agreed interest rate on the purchase price) that compensates you for operating the business on their behalf.
- Maintain standard operational cadence. Ensure your leadership team runs the business under the ordinary course of business covenant without deferring vendor payables or accelerating customer collections to artificially preserve cash.

A locked-box provides certainty of net proceeds at close, saving you from months of post-acquisition accounting battles with buyer audit teams.