Lock Box System In Working Capital Management

When a locked box mechanism is appropriate.

Lock box system in working capital management.

Deal metrics working capital net debt etc being determined from independently verified financials. Usually involves a company s customers remitting amounts to a bank account close to the customers in order for the company to have collected funds sooner. If there is too large a time lapse between the last audited accounts and proposed closing date the seller and buyer may agree on a more recent management accounts balance sheet to lock. Most acquisitions of private companies include a working capital adjustment.

For the seller a locked box approach is difficult to apply without an anchored balance sheet and the seller can always lose out should the interest profit charge be set too low. While it is. Lockbox banking is a service provided by banks to companies for the receipt of payment from customers. Under this method the purchase price is determined based on a date that precedes the closing date.

The bank opens the incoming mail deposits all received funds in the company s bank account and scans the payments and any remittance information. The locked box date with key deal metrics working capital net debt etc being determined from independently verified financials. For example a company with its headquarters in the midwest might have a bank account in new york for its east coast customers to mail in amounts owed. A locked box mechanism is a means of fixing the purchase price payable on completion of a share sale by reference to the target group s balance sheet position ie its net debt and working capital at an agreed point in the past the locked box date effectively the purchase price is fixed at and the buyer takes the economic benefit risk of the target group from the locked box date not.

The scanned images are posted to a secure website where the company s accounting staff can access the images to apply payments to. This is often a very sensitive part in the negotiation of a private m a deal. The locked box mechanism entails that the purchase price payable on the transaction s closing date closing is agreed and fixed at the date of. There are pros can cons when it comes to lockbox banking.

However it is possible to do away with it entirely by using the locked box mechanism. The effective date balance sheet must accurately reflect the configuration and resulting working capital and debt of the business in the form in which it will be delivered to the purchaser. If there is too large a time lapse between the last audited accounts and proposed closing date the seller and buyer may agree on a more recent management accounts balance sheet to lock.