Meaning and transaction use
DLA Piper explains that locked-box pricing uses the target's historical balance-sheet position and allocates economic benefit and risk from the agreed date. Its discussion identifies leakage as seller-related value extraction and permitted leakage as expressly agreed exceptions. The reliability of the reference accounts is central to the buyer's review. [S1]
Proposed review method: maintain a pricing bridge and a separate leakage ledger. Link every bridge line to the agreed accounts and definitions. For later payments, record recipient, date, purpose, amount and the applicable permission or claim provision. Record unresolved classifications before the closing funds flow is finalised.
Worked example
Illustrative assumptions only. Enterprise value is USD 30 million. The parties agree USD 2 million of cash, USD 7 million of debt and a negative USD 500,000 working-capital adjustment at the reference date. Assume no value-accrual payment and no further pricing adjustment.
Scroll the table horizontally to view all columns.
| Bridge item | Amount | Effect |
|---|---|---|
| Enterprise value | USD 30,000,000 | Starting amount |
| Agreed cash | USD 2,000,000 | Add |
| Agreed debt | USD 7,000,000 | Subtract |
| Working-capital adjustment | USD 500,000 | Subtract |
| Illustrative equity price | USD 24,500,000 | Agreed bridge result |
The stated bridge produces USD 24.5 million. A subsequent USD 100,000 seller-related payment would require classification under the actual leakage provisions. Its existence alone does not establish an automatic deduction, claim entitlement or collection.
Proposed transaction review process
Select the reference point
Identify the accounts date, accounting basis and available audit or diligence evidence.
Agree the bridge
Document cash, debt-like items, working capital and any value-accrual mechanics.
Review value transfers
Trace seller-related payments and benefits against the permitted-leakage schedule.
Prepare closing evidence
Reconcile payment instructions, confirmations and any unresolved leakage matters.
Evidence checklist
Reference accounts
Financial statements, supporting ledgers and audit or financial-diligence findings.
Pricing definitions
Signed bridge, classification decisions and treatment of disputed items.
Leakage ledger
Related-party payments, dividends, management charges and their supporting approvals.
Agreement and notices
Permitted-leakage wording, claim procedures, deadlines and contractual remedies.
Decision framework
| Situation | Proposed action |
|---|---|
| Reference accounts omit a material liability | Assess the pricing and contractual implications before accepting the bridge. |
| A seller payment is described as ordinary course | Check its express treatment and any cap in the agreement. |
| Completion is delayed | Recalculate any agreed value accrual and refresh the leakage review period. |
| The parties disagree on a transfer | Preserve evidence and apply the agreed notification and dispute process. |
Common errors to check
- Accepting the reference date without assessing the underlying accounts.
- Treating all seller-related payments as contractually permitted.
- Counting the same item in both debt and working-capital adjustments.
- Missing a contractual notice deadline while a classification remains disputed.
Review the price and leakage evidence
Bring the proposed reference accounts, equity bridge and seller-related payment schedule to an M&A discussion. Identify the unresolved classifications and legal drafting work before agreeing the final funds flow.
Discuss the transactionPrimary references and editorial scope
- DLA Piper: Locked Box
Historical pricing date, equity bridge, leakage and reference-account review. Reference checked 17 September 2026.
General M&A education. The worked example and review process are illustrative. This source explains mechanics; current transaction rights, deadlines and remedies depend on the executed agreement and applicable law.
General business information. Obtain advice appropriate to the legal, tax, accounting and financing facts. No offer, lender commitment or transaction outcome is represented. All worked examples use expressly assumed figures. Editorial draft date: 17 September 2026.
