The buyer is insisting on a locked box pricing mechanism instead of a closing accounts adjustment, but we are growing rapidly. How do we evaluate which working capital adjustment mechanism protects our balance sheet during the LOI-to-close phase?

Question

Tyler Smith · Accepted Answer

During the LOI-to-close phase, deciding between a locked box pricing mechanism and a closing accounts adjustment is critical, especially for a rapidly growing company. A locked box mechanism fixes the equity value based on a historical balance sheet date, whereas a closing accounts adjustment calculates the net working capital on the actual closing date.

If your business is growing fast, a locked box mechanism can penalize you. The cash generated between the locked box date and the closing date will remain in the company, essentially gifting your operational growth to the buyer for free. To protect your balance sheet, you must negotiate a closing accounts adjustment with a fair working capital target.

Calculate your working capital target using a trailing twelve-month average to account for any seasonal fluctuations. Ensure that you have clear definitions of what constitutes cash, debt, and working capital in the purchase agreement. Use your weekly EOS® financial metrics to track your inventory, accounts receivable, and accounts payable in real-time. By keeping tight control of your balance sheet metrics during the closing process, you ensure that you are paid for every dollar of value you create up to the exact minute of the ownership transition.