Locked Box Models in Contracts for the Sale of Businesses / Acquisition of Businesses ("SPA")

Sales and Purchase Agreement - Adjustment of the purchase price via the cash free/debt free rule as opposed to "locked box" models

In recent years, the "locked box" model has increasingly been used instead of a net debt rule (or cash free/debt free rule or definition of the net amount of financial liabilities) in the context of purchase/sale agreements (SPA or Sales and Purchase Agreement) in M&A transactions. Both concepts originate from the Anglo-Saxon world; in contrast to the variant of the definition of equity known in Germany. The cash free/debt free rule was dealt with in a separate article. In the meantime, the definition of equity as of the reporting date is practically no longer found in SPAs.

In day-to-day M&A practice, one notices that a large number of company sellers have difficulty with the cash free/debt free rule and the associated definition of working capital. Especially the assessment of possible effects on the final amount of the purchase price through adjustments of the net amount of financial liabilities as well as the determination of the amount of working capital, which can fluctuate strongly during the year, is not easy to implement for many company sellers without an M&A advisor and is often difficult to understand even without explanations by the M&A advisor.

Furthermore, private equity and venture capital companies are not interested in a cash free/debt free rule when selling a portfolio company and prefer the locked box model instead. Against this background, the locked box model is also increasingly found in M&A transactions in Germany, Austria and Switzerland in purchase/sale agreements ("SPA").

The Locked Box Model - Fixed Purchase Price

The locked box model defines a fixed purchase price. In contrast to the cash free/debt free rule, there is no adjustment of the purchase price for the net debt and the working capital on the reporting date. The locked box model thus assumes that there have been no material changes outside the ordinary course of business since the last balance sheet date.

This means that the net amount of financial liabilities as well as the amount of working capital on the reporting date (according to the purchase agreement) do not deviate significantly from the last balance sheet date; for example, there was no significant increase in receivables, reduction of liabilities, taking up of new bank loans, etc. The locked box model is based on the assumption that there have been no material changes outside the ordinary course of business since the last balance sheet date. The basis of the locked box model is thus the assumption that no funds have flowed out of the company and that the structure of the balance sheet has not changed from the last balance sheet date to the reporting date according to the purchase agreement.

For this reason, in SPAs based on a locked box model, there is a paragraph that defines the "cash outflow" compared to the last balance sheet date. In such a warranty of the seller of the business, the allowable cash outflow is defined (e.g. profit distributions or interest payments). Furthermore, in the case of locked box models, there is a provision in purchase agreements on the way in which the business seller must conduct the business since the last balance sheet date; namely in the same way as before.

Finally, in the SPA, the business seller assures the continuation of the business between signing and closing in the same way as before (no cash outflow, only ordinary business).

Locked box model or cash free/debt free scheme?

In M&A practice, both models are used. Ultimately, it depends on the bargaining power of the buyer or the seller which model is included in an SPA. The seller will prefer the locked box model, whereas the buyer will prefer the cash free/debt free arrangement, as this allows a clearer definition of the amount of the purchase price.

Locked box models are covered in detail in the new June 2018 edition of Beck'sches Formularbuch Mergers & Acquisitions. At Beck's Form Book Mergers and Acquisitions (June 2018 edition). Checklists and samples can be found in the CD-ROM enclosed with the book in usable file formats.

KP Tech Corporate Finance

As a professional M&A consultancy, we support company buyers as well as company sellers in the complete M&A process. We are happy to advise you on the negotiation of the Sales and Purchase Agreement (no legal advice). Contact KP Tech Corporate Finance in strict confidence by telephone directly: +49 89 21 53 66 09-0.

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KP Tech has been providing consulting services for more than 20 years with a focus on company acquisitions, company sales, company succession, equity capital and company valuation. Our clients include small and medium-sized companies as well as international groups and private equity companies. Most of our clients come from the technology, services and consumer (including e-commerce) & healthcare sectors.


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