Locked-box mechanisms is used by the selling dealer to allowed him to ensure the operation and, I addition, cover the increase in value of the company are the cash and debt adjustment and the locked-box.
In the locked-box, the parties agree on a fixed price based on the financial statements of the acquired company on a certain date prior to closing that will not suffer value extractions (leakages) in favor of the seller, except for deviations that may have occurred during the period interim. Therefore, this means that the box remains closed from a set date until the closing of the operation, thus ensuring the normal development of the business and avoiding decision-making that may have a material impact. The mains different of this mechanism from the rest is is the date of transfer of the economic risk of the target business performance.The economic risk is transferred to the purchaser at the locked box date, a date prior to the signing of the contract: The date of the reference financial statements.
It is a system that offers greater certainty to the seller about the price, pro-seller, the lack of need to closed additional financial statements, simplifies and minimizes conflicts in negotiations and reduces deadlines and save costs. However, it can also affect negatively the selling company since, in the case of generating value for the company on a later date than the established date, the seller will not be rewarded for it.
In the event of the latter situation, the seller, however, would have certain mechanisms that would allow it to ensure the closing dealing of the transaction and solve the problem of generating extra value. The most used mechanisms are: i) ticking fee, which allows to increase the price per share, for example, payments of interest day after the effective day; ii) reverse break-up fee, which consist in a certain amount of money paid to the target company after the acquirer backs out of the deal and, finally, iii) dividend payments on shares wholly recognized as liabilities, based in different milestones overview screen.
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