Locked Box Leakage: Identifying and Quantifying Permitted and Non-Permitted Value
Locked Box Mechanics
In a locked box deal, the purchase price is fixed by reference to a historical balance sheet (the locked box date). The seller receives a daily accrual (interest on the locked box price) between the locked box date and completion.
In exchange, the seller warrants that no leakage has occurred after the locked box date. The buyer takes the economic risk of the business from the locked box date, not from completion.
Leakage Definition
Leakage is value extracted from the target by the seller or related parties between the locked box date and completion, contrary to the leakage provisions in the SPA. The SPA defines both leakage (prohibited) and permitted leakage (allowed).
Typical leakage includes dividends, management fees to the seller, bonuses above ordinary course levels, asset transfers to related parties, and any payment not in the ordinary course of business.
Investigation Methodology
The expert reviews bank statements, management accounts, board minutes, and payment records for the locked box period. Every payment and transfer involving the seller or related parties is identified and tested against the SPA leakage definition.
The expert distinguishes permitted leakage (expressly allowed under the SPA) from non-permitted leakage and quantifies the total recoverable amount.
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