Using a ‘Locked Box’ To Value A Company

When it comes to ways of ascertaining a target company’s price, there are different methods that can be adopted. One common way is to calculate the company’s value after completion, by reference to completion accounts drawn up to the completion date. However, an alternative method is to have a “Locked Box” transaction.

What is a Locked Box transaction?

This is perhaps best thought of as the ‘fixed price’ method, where the price of the target company is agreed prior to completion of the deal. A set of accounts known as “Locked Box Accounts” will be prepared at a date before the deal completes and this will be used by the parties to agree the price to be paid.

When to use the Locked Box mechanism?

This will usually be determined by factors such as the circumstances of the deal and/or the nature of the business or industry of the target company. For example, due to the nature of the target company’s business, its assets and value may be unlikely to change between the date of the Locked Box Accounts and the date that the deal actually completes. Also, it is often the method used where parties are trying to reduce costs as it is less complex and doesn’t require the preparation, negotiation and review of completion accounts at a point after completion of the transaction.

What are some advantages of the Locked Box transaction?

• Provides certainty of the price.
• Is a less complex method of calculation.
• Saves on costs for the client due to the reduction in time and work required post completion.

What are some of the disadvantages of the Locked Box transaction?

• It’s not suitable for all transactions (for example, where a company’s balance sheet value is more volatile).
• Value may be removed from the target company (“Leakage”) between the date of the Locked Box Accounts and the date of completion of the transaction.
• Additional provisions will need to be included within the purchase/sale agreement to protect against the risk of Leakage, which will likely increase time and costs.

What is an alternative to the Locked Box transaction?

Another pricing mechanism that may be used is preparing completion accounts to ascertain the net asset value of the target company (normally at the close of business on the completion date). Any difference between the net asset value shown in the completion accounts and the pre agreed target value would determine whether additional consideration is payable to the seller(s) (where there is an increase in the net asset value) or a reduction in the consideration to be paid, which may involve the return of some consideration already paid, to the buyer (where there is a reduction in net asset value).

If you have any questions about Locked Box transactions or would like to discuss any other matter in relation to a corporate transaction, please contact our Corporate and Commercial team on 0116 289 7000 or email info@bhwsolicitors.com.