A closed box does not provide protection to the buyer against the usual changes in the price of the trade value between the date of the reference accounts and the financial statements. As stated above, after the signature of the SPA (assuming that no conditions have been agreed separately), the buyer will assume the economic risk and economic reward of the company with retroactive effect from the date of the closed box to closing. Therefore, it is unlikely that such a mechanic will be acceptable to a buyer: in addition, the buyer will settle the outstanding business-to-business balances with the seller once completed (as he inherits the obligation to settle all other liabilities of the business once completed). The reason for this is that, on the other hand, the buyer enjoys the benefit of profit without bearing the maintenance costs of the acquisition cost during this moulting period. The sales contract generally provides that any unauthorized leak is refundable by the seller on an unlimited basis in dollars for dollars, whereas, as a general rule, any refund request must be claimed within a relatively short period of time after closing (usually between 6 and 12 months). In addition, a locked box approach can make it easier for a seller to compare bids at an auction, as bidders are asked to submit a fixed price based on a number of locked box date accounts indicated by the seller in the due diligence information. The locked box concept provides that the seller provides a balance sheet for the business sold on a date (“effective date”) before the signing of the SPA and that he generally guarantees, but usually as close as possible to the potential completion date. In the case of a traditional balance sheet adjustment, the purchase price is paid as an estimate at closing. The purchase price is then adjusted after closing on the basis of the difference in the entity`s working capital1 between the number used to determine the estimated purchase price (or other reference figure) and the actual value calculated from a balance sheet of clearance of targets established at the balance sheet date. As mentioned above, an important aspect of a locked box mechanism is that no value goes out of the box before the closing date. Leakage refers to the seller extracting the value of the target during the period from the date of the locked box to the closing date. The parties must identify any leaks, as the seller`s obligations to prevent leaks are usually covered by pound-by-pound compensation. On the other hand, using a locked box mechanism, the purchase price is usually called “locked box” by referring to a recent historical set of accounts dated before the date of signature of the SPA.
As the amount of liquidity, debt and working capital is therefore known to the parties at the time of signing the SPA, the agreed price of the target transaction is fixed and recorded in the SPA. Therefore, the buyer does not have the opportunity to adjust the purchase price after closing and must rely on contractual safeguards (through warranties usually backed by indemnification) to ensure that no value leaves the box until the closing date. One of the main effects of this approach is that the economic exposure (profit and risk) to the target is effectively transferred from the seller to the buyer on the date of the closed box and not on the closing date. . . .