In the US, unlike in Europe, deals are traditionally transacted on the basis of closing accounts, with adjustments made post-closing for working capital, indebtedness, cash, and transaction expenses.
This is now changing. Recent deal activity shows US private equity vendors, having become accustomed to the concept of a locked box in European sales processes, increasingly pivoting toward a locked box pricing structure in US domestic deals. These vendors are attracted to the fixed price certainty, as compared to the closing accounts approach.
However, as locked box structures are still relatively new in the US, the US construct tends to be more heavily negotiated than on European processes, in which market norms are more clearly set. US buyers and their US advisors — uncomfortable with taking on the full risk of underperformance of the target business in the period between the locked box date and actual closing — may try to retain elements of the closing accounts structure they are most familiar with. For example, US buyers may seek purchase price adjustments for specific debt-like items or push for the scope of the “leakage” concept to be expanded.
It is important for PE firms to be aware of the recent US locked box trend. As US market practice develops, we expect US buyers to bring part of the US market practice to European auction processes. Eventually, this may even result in a new “global” locked box standard.