Stella Lellos, left, and Lindsay Brocki, right, of Rivkin Radler. Courtesy photos

Introduction

In private mergers and acquisitions (M&A) deals, purchase price adjustments play a crucial role in the determination of the final transaction value. These adjustments often hinge on net working capital calculations, which can introduce complexities and prolonged negotiations that detract from a smooth closing process. In response to these challenges, the locked box mechanism has emerged as a compelling alternative.

The locked box mechanism allows parties to agree upon a fixed purchase price based on an audited balance sheet as of a predetermined date, thereby eliminating the need for post-closing adjustments. This methodology serves as an effective and straightforward technique for facilitating a smooth closing process, ultimately reducing late-stage financial negotiations that may otherwise complicate the transaction and prolong the finalization of the deal.

Initially prevalent in the U.K. and Asia, the locked box approach is gaining traction in the United States due to the growing demand for expedited M&A transactions and a robust seller's market. The shift toward locked box structures is also driven by financial investors seeking cleaner and quicker negotiations.