This post uses hypothetical scenarios for illustrative purposes only. It does not describe any actual client, transaction, or representation, and is not legal advice.
The first time I saw a locked-box mechanism in a U.S. middle-market deal, I assumed someone had pulled the wrong precedent off the shelf. It was the spring of 2024, the target was a Florida-based industrial-services roll-up, the buyer was a U.K.-headquartered strategic, and the draft purchase agreement had no working-capital adjustment, no estimated closing balance sheet, no post-closing true-up, and no closing-date purchase-price calculation at all. Instead it had a fixed purchase price, an “effective date” that sat two months before signing, and a one-page covenant that prohibited “leakage” from the target between the effective date and closing. The seller’s counsel had been a partner at a Magic Circle firm in London for fifteen years before moving to Florida. The mechanism had not been pulled off the wrong shelf. He had pulled it off the right shelf for him.
That was the outlier in 2024. By the back half of 2025 it stopped being the outlier. I am now seeing locked-box mechanisms in roughly one in eight private-target deals I look at where the buyer is a private equity sponsor with a European fund family, in maybe one in twenty deals where both sides are U.S.-only, and the trend line is sharply upward. The U.S. middle market has spent thirty years assuming that the closing-accounts model — estimate at closing, true-up afterward — is just how private M&A works. It is not how it works in Europe, and the European model is starting to push into U.S. transactions for reasons that have less to do with theology than with what private equity sponsors have learned about working-capital disputes over the last decade.
The two mechanisms answer the same question differently. Both are trying to figure out what the buyer should pay for the equity of the target as of the moment the buyer takes economic ownership. The closing-accounts model says: we will estimate the closing balance sheet at the closing date, agree to a purchase price based on that estimate, and then run a true-up sixty to ninety days later when the actual closing balance sheet is finalized. The locked-box model says: we will pick a date in the past — usually the most recent quarter-end or year-end audited balance sheet — call that the locked-box date, fix the purchase price as of that date, and require the seller to deliver the business to the buyer at closing in substantially the condition it was in on the locked-box date, with all economic value generated in between flowing to the buyer.
What “leakage” actually means
The locked-box mechanic does two things at once. First, it freezes the purchase-price calculation at the locked-box date, which means the buyer is buying the business as it stood at, say, December 31, 2025, even though the deal closes on March 17, 2026. Second, it requires the seller to covenant that, between the locked-box date and the closing, no value will leak out of the target other than expressly permitted “permitted leakage” — generally limited to ordinary-course operating expenses, agreed management compensation, and tax distributions if the target is a pass-through.
The leakage definition is the heart of the negotiation. Prohibited leakage typically includes dividends or distributions to the seller, transaction-related bonuses outside of the agreed schedule, related-party payments to the seller or its affiliates, repayment of seller loans, settlement of pre-locked-box liabilities, and any non-ordinary-course payments of any kind. The seller indemnifies the buyer dollar-for-dollar for any prohibited leakage that occurs between the locked-box date and closing. The indemnification is uncapped, not subject to a basket, and survives closing — which is unusual for an M&A indemnification provision and gets sellers’ attention quickly the first time they read it.
The flip side is the “ticker” or “interest” mechanism — a daily accretion to the purchase price between the locked-box date and closing, designed to compensate the seller for not having access to the cash being generated by the business during the interim period. The ticker is usually expressed as a fixed daily amount or as a percentage rate applied to the purchase price. Sellers like a ticker because it captures their share of the value the business creates between the locked-box date and closing. Buyers tolerate it because the ticker is much less expensive than the working-capital disputes that the closing-accounts model produces.
Why U.S. buyers are starting to want this
The working-capital adjustment has become the most litigated provision in private-target M&A. Earlier this year I wrote about the working-capital target number and the post-closing true-up, and the data on post-closing disputes has only gotten worse since. Industry surveys put the rate of working-capital adjustment disputes at somewhere between thirty and forty percent of all deals with a true-up mechanism, and the median dispute amount has crept up year over year. The mechanism that was supposed to deliver a precise purchase-price calculation has turned into a predictable second negotiation, with second lawyers, second accountants, and second valuation experts.
The locked-box model essentially eliminates the second negotiation. There is no closing balance sheet. There is no true-up. There is no dispute about whether a particular item is “current” or “long-term” or whether the seller’s accounting policies have been “consistently applied” in the months leading up to closing. The seller delivers the locked-box balance sheet at signing. The buyer’s accountants review it during diligence. The number is the number. The only post-closing dispute is whether prohibited leakage occurred — which is a much narrower and more discrete inquiry than the open-textured working-capital fight.
The trade-off is diligence intensity. The closing-accounts model lets the buyer back-end its review of the closing balance sheet, because the true-up is the remedy for getting the closing estimate wrong. The locked-box model forces the buyer to do a much more thorough review of the locked-box balance sheet at signing, because there is no back-end remedy other than the leakage claim. For a sophisticated PE buyer with a quality-of-earnings provider already engaged, that diligence is largely happening anyway, so the marginal cost is small. For a less-resourced buyer, the locked-box mechanism shifts the diligence burden in a way that may not net out favorably.
The signing-to-closing risk shift is the real story
The biggest analytical mistake U.S. lawyers make when they first see a locked-box deal is to focus on the purchase-price mechanic and miss the interim-period risk shift. Under a closing-accounts model, the seller bears the economic risk of the business between signing and closing — if working capital drops or debt accrues, the closing-date purchase price adjusts down to reflect it. Under a locked-box model, the buyer bears that risk, because the price is fixed and the leakage covenant only catches discrete extractive payments, not garden-variety business deterioration.
This is why locked-box deals frequently include a much tighter ordinary-course covenant than U.S. deal lawyers are used to drafting. The seller is now constrained not just from extracting value through distributions or related-party payments, but from operating the business in any manner inconsistent with the way it was being operated on the locked-box date. Capital expenditure schedules get attached. Compensation increases require buyer consent. Customer-pricing changes require buyer consent. The covenant resembles, in many places, the standard U.S. interim-period ordinary-course covenant — but the consequences of breach are different, because the buyer’s remedy is direct damages rather than a closing-condition walk-right.
A point that gets lost in the U.S. discussion: locked-box pricing materially changes what an MAC clause does. In a closing-accounts deal, the MAC is the buyer’s nuclear option for catastrophic interim deterioration, and the working-capital adjustment handles the ordinary cyclicality. In a locked-box deal, there is no working-capital adjustment to handle the ordinary cyclicality, and the MAC has to do work it was not designed to do. Either the MAC threshold gets tightened, or the ordinary-course covenant gets broadened, or the buyer learns the hard way that the locked-box price is fixed even when the business is not the business it was on the locked-box date.
Where the model fits in the U.S. and where it does not
The deals where locked-box pricing makes the most sense in the U.S. middle market are deals with short signing-to-closing periods, audited or near-audited target financials, sophisticated quality-of-earnings work that the buyer can complete pre-signing, and a target whose working capital is reasonably stable quarter to quarter. PE secondaries, sponsor-to-sponsor deals, and stable mature-industry roll-ups fit this profile. Deals that do not fit it: highly seasonal businesses, businesses in the middle of a working-capital transition (a switch from monthly to annual customer contracts will distort the locked-box balance sheet in ways the buyer cannot easily price), distressed targets, and deals with long regulatory signing-to-closing periods. A locked-box deal that closes nine months after the locked-box date because of HSR review will price the target as it stood three quarters ago, which is rarely the right answer.
The Florida middle-market context adds two wrinkles. The first is that Florida-domiciled targets in industries with heavy seasonal revenue patterns — hospitality, agriculture, marine services — are particularly bad candidates for locked-box pricing without a seasonally-adjusted ticker. The second is that Florida pass-through targets need careful drafting of the permitted-leakage carve-out for tax distributions, because the locked-box mechanic assumes that the tax distribution is calculable in advance, and the K-1 timing in an S-corp or LLC target frequently does not cooperate. I have seen Florida deals where the tax-distribution carve-out was drafted as a fixed-dollar permitted leakage and then turned into a fight when the actual pass-through liability ran higher.
The right way to think about whether locked-box is appropriate for a particular deal is not as a transatlantic stylistic choice but as a question about which of two known frictions you want. The closing-accounts model gives you a working-capital adjustment dispute. The locked-box model gives you a diligence-intensity burden and a leakage-monitoring covenant. Each has a cost. The question is which cost is lower for the particular deal, given the buyer’s diligence capacity, the target’s financial stability, and the expected length of the signing-to-closing period. The U.S. corporate-governance commentary on closing mechanics has started catching up with the European practice, and U.S. deal lawyers who have only ever drafted closing-accounts agreements will increasingly find themselves on the other side of a locked-box term sheet from a sponsor whose European fund family treats it as the default.
The mistake to avoid is the one I saw on a U.S.-only deal earlier this year — a buyer that agreed to locked-box pricing on a term sheet without understanding the interim-period risk shift, then tried to negotiate the locked-box mechanic backward into something resembling a closing-accounts model in the long-form. The result was a hybrid that had the diligence burden of locked-box, the dispute risk of closing accounts, and the indemnification architecture of neither. The locked-box model is internally coherent. The closing-accounts model is internally coherent. The middle ground is internally incoherent and produces the worst outcomes of both. Picking the right purchase-price mechanism is one of the first three decisions in any M&A deal, and 2026 is the year that decision actually has two real choices in the U.S. middle market.
If you are negotiating a deal where the buyer or seller has proposed locked-box pricing and you are trying to figure out whether to engage with it or to insist on a closing-accounts model, feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
