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Controlling purchase prices: the locked box mechanism

November 2010 - Corporate & Commercial. Legal Developments by Delphi.

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From the seller's perspective, knowing the outcome of the sale process in terms of the price that it will obtain for a company is always of great importance. Usually, a buyer will make an offer to buy a company on a 'cash and debt-free' basis, meaning that the purchase price offered (ie, the enterprise value) will be adjusted up or down depending on the company's financial position at a given time to reach the actual purchase price.

Simply put, any cash or cash equivalents owned by the company will increase the purchase price, while any debt will decrease the purchase price. How the purchase price should be determined is an integral part of the share purchase agreement and is often intensively negotiated between the buyer and the seller. Two different approaches prevail: the closing balance sheet adjustment and the fixed purchase price or locked box mechanism. While the closing balance-sheet adjustment may be the most common approach in the current market environment, the locked box mechanism can be the preferred route from the seller's perspective.

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First published in ILO, Corporate Finance/M&A - Sweden. www.iloinfo.com


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