Locked box, explained
- kamfaulkner
- Sep 25
- 3 min read
How do you stop the price of a business sale becoming a moving target?
That’s the problem a locked box solves. It’s a pricing mechanism often used in SME share sales to give sellers price certainty and buyers economic ownership before completion.
Unlike traditional approaches, there’s no price adjustment after the deal closes.
What is a locked box?
A locked box is a deal structure where the purchase price is fixed based on a historical set of accounts, called the locked box accounts, drawn up at a specific date before completion (the locked box date).
From that point on, the company is treated as though it economically belongs to the buyer, even though legal ownership transfers later.
Critically, the seller agrees not to extract value from the business between the locked box date and completion, except for a narrow list of permitted items. Any other value taken out is known as leakage and typically leads to a pound-for-pound reduction in the sale price.
A quick example
Let’s say you’re selling your business:
You agree on a price based on 31 December 2024 accounts.
That becomes your locked box date.
You complete the sale in March 2025.
Between Jan–March, you continue trading, but can’t take money out unless agreed in advance.
Any profit made after 31 Dec effectively belongs to the buyer.
The buyer pays the agreed price, no post-deal adjustments needed. Simple (if done properly).
Why use a locked box?
Sellers like it because they get:
Price certainty; no post-deal wrangling over accounts.
Clean exit; less back-and-forth with accountants after completion.
Faster process; the deal can close without waiting for fresh financials.
Buyers accept it when:
There’s confidence in the target’s financials.
Leakage protection is built into the sale agreement.
Due diligence gives them comfort that no value is slipping through.
What’s considered “leakage”?
Leakage includes any value the seller takes out of the company between the locked box date and completion, unless the buyer agrees to it.
Common examples:
Dividends or capital repayments.
Payments to shareholders or related parties.
Excessive management bonuses.
Intra-group transfers or off-market asset sales.
New debt taken on for the seller’s benefit.
To protect the buyer, the sale agreement will include anti-leakage covenants and warranties, often backed by an indemnity for any unauthorised leakage.
What’s allowed? (“Permitted leakage”)
Not all payments are forbidden. Commonly permitted leakage includes:
Salaries or benefits already disclosed and agreed
Normal operating expenses
Deal-related costs (e.g. legal, accounting fees)
Buyers will usually set a short window (e.g. 3–6 months) after completion to raise any leakage claims.
When is a locked box the right option?
Locked box tends to work well if the following conditions apply:
In some deals, locked box pricing is used alongside other protections, such as earn-outs (see Earn-outs, explained) or retentions.
Key considerations for sellers
Before opting for a locked box, make sure:
Your accounts are up-to-date and reliable.
You understand what counts as leakage.
You can operate the business without needing to take out funds.
There’s a fair buffer period between the locked box date and completion.
Some sellers also push for a “ticking fee”; a small daily charge if completion is delayed, to reflect the buyer benefiting from profits in the interim.
Final thoughts
A locked box mechanism gives SME sellers certainty, speed, and simplicity; but it’s not risk-free. If you’re thinking of using a locked box to sell your business, get expert input early. The detail in the sale agreement makes all the difference.
Need advice on structuring your business sale?
We help SME owners across the East Midlands and beyond sell on their terms, with less stress and fewer surprises.
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Disclaimer
This content is for general information only and doesn’t constitute legal, accounting, financial, or tax advice. It’s based on the law of England & Wales and was correct at the date of publication, but the law and guidance can change. Reading this page doesn’t create a solicitor–client relationship with Orbit Legal. Please take advice on your specific circumstances before acting. Get advice for your situation by contacting Orbit Legal at info@orbitlegal.co.uk or 0115 6777095.
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