ELI5: Locked box
Hi all, could someone explain to me the locked box process as if I was 5? I understand the concept of it but I'd be curious to learn more about it in greater detail. Also, how do you think about it? Common issues, negotiation points, reasoning behind it, amount of leakage in practice, how important it is in the grand scheme of things and so on. Thanks a lot!
Hello there,
So locked box has been one of the two main options to reach final Equity Value. The other one being completion/closing accounts. As your question evolves on the first one I will focus on it but it’s good to understand the main differentiator.
The main characteristic of the locked box vs completion accounts is the timing of flows and their nature.
In a locked box context, let us imagine Company A is the buyer of Company B. Company A says: I will purchase you, Company B for a specific price - which is determined upon signature of the agreement. In this Purchase Price, I will factor in a bridge leading to Equity value which takes into account what Company B’s balance sheet should look like at the date of the Locked Box. From the moment between signing and locked box any leakage is forbidden so that the nature of the BS remains relatively the same and there is no unwanted leakage: dividends, specific management fees etc. - but you may keep permitted leakage; like normal working capital flows.
This enables Equity Value to be identified / paid earlier than under closing accounts formats where payment occurs after closing of the transaction.
In Closing accounts, a clear computation from Enterprise Value to Equity value is agreed in advance including a Net Working Capital level but there is no definitive value pointed on Equity Value. All statements need to be re-computed as of closing accounts date which makes the process longer during the negotiation and for the final adjustments.
Hope this clarifies.
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