Working capital lock-ups are contractual restrictions and cash control mechanics that limit how value can be moved out of a business between signing and closing. They sit between purchase price adjustment frameworks and interim operating covenants, with a narrower job than protecting value in the abstract. They prevent specific, repeatable leakage patterns that show up in real closings, especially when the seller still controls cash, treasury, and payables. For finance professionals building acquisition models and negotiating deal terms, lock-ups reduce the probability that post-close working capital adjustments become contentious forensic exercises. They also protect the buyer from paying for temporary balance sheet cosmetics that reverse within weeks.
Lock-ups differ from purchase price adjustments tied to working capital. A purchase price adjustment measures a balance sheet outcome at closing and trues up price later. A lock-up constrains behavior and cash movements before closing and often through the first post-close measurement date. In practice, the two are complementary because the lock-up reduces the chance that the true-up becomes a dispute about classification, timing, and intent.
Lock-ups also differ from debt cash dominion in credit agreements. Cash dominion gives lenders control over cash flows when triggers are hit. Working capital lock-ups are negotiated bilateral constraints, typically with buyer consent rights, escrow mechanics, or blocked accounts. They operate in a short window, but the economic stakes can be large because small changes in payables timing, receivables collection practices, inventory purchases, and intercompany settlement can move the working capital peg and affect net debt.
The scope of working capital is not standardized. In deals it is usually defined as current assets minus current liabilities, with negotiated inclusions and exclusions. The lock-up scope is typically broader than the working capital definition because leakage can occur through accounts not included in the peg. Common out-of-peg but value-relevant items include cash taxes, insurance prepaids, customer deposits, deferred revenue, accrued bonuses, restructuring accruals, and related-party payables.
The more bespoke the peg, the more a lock-up matters. Sellers can arbitrage classification and timing when the measurement framework has carve-outs, reclasses, or policy elections. As a result, finance teams should treat the lock-up as a control layer over the cash pathways, not as a footnote to the accounting definition.
Stakeholder incentives are straightforward. Sellers want flexibility to run the business and optimize cash and tax. Buyers want continuity and want to avoid paying for temporary balance sheet improvements. Management may be incentivized on EBITDA and cash conversion, which can conflict with a buyer’s desire for ordinary-course working capital levels. Lenders and private credit providers care because working capital swings change leverage at close and can create immediate covenant pressure if debt is sized off a pro forma model that assumed normal seasonality.
The cleanest way to think about lock-ups is as targeted constraints against three failure modes: pre-close extraction, window-dressing at close, and operational disruption caused by aggressive cash moves that hurt customers or suppliers.
Deal structure drives both the need and the drafting style. In a completion accounts deal, the buyer is theoretically protected by the closing balance sheet and net debt and working capital adjustments. In practice, measurement disputes and classification battles can take months to resolve. That delay matters if leverage is tight, because the buyer may fund a liquidity hole before the adjustment is paid.
In a locked-box deal, the buyer fixes the price at an effective date and relies heavily on anti-leakage protections. In that structure, working capital lock-ups and leakage covenants become the primary economic protection between effective date and closing because there is no completion accounts true-up. Cross-border deals often combine approaches, using a locked-box price with specific closing adjustments for debt-like items, plus tighter interim covenants.
Boundary conditions also matter. If the business is seasonal, a lock-up that freezes working capital at signing levels can be value-destructive. The covenant should preserve the seasonal pattern, not a point-in-time number. Similarly, if the target relies on supply chain finance, factoring, or dynamic discounting, a lock-up that bans changes in payment practices can unintentionally trigger vendor pushback or program termination.
A working capital lock-up starts with a clear prohibited actions list. The list should be anchored to concrete behaviors, not accounting outcomes. Typical prohibited actions without buyer consent include dividends and distributions, upstreaming cash through intercompany settlements outside ordinary course, prepaying expenses, accelerating or paying non-ordinary bonuses, settling claims early, amending payment terms with key suppliers or customers, entering supply chain finance programs or changing their terms, and drawing or repaying debt outside scheduled amortization.
The best lists are not generic. They reference the target’s actual cash pathways. If the business participates in a cash pool, the lock-up needs to specify whether it can remain in the pool and under what caps, whether balances are deemed intercompany loans, and how interest is allocated. If the business uses a centralized procurement company, the lock-up needs to address intercompany payables and prevent acceleration designed to pull cash out.
Lock-ups also require reporting and observability. A covenant that cannot be monitored invites breach. Buyers increasingly require weekly cash reporting during the interim period, including bank statements, aged receivables and payables, and a schedule of related-party transactions. Where the seller resists operational burden, buyers can negotiate materiality thresholds for approvals, but they should not concede on baseline visibility into treasury movements.
Information rights can include read-only statements or bank-delivered daily statements to both parties or to an escrow agent. Certification by a named finance officer is more than formality. It creates accountability and reduces later arguments about what was known when the cash moved.
Cash control usually protects the economics better than pure covenanting. A common approach is to establish a dedicated collection account for key receipts, with a blocked account arrangement that limits withdrawals above a threshold without dual authorization. Another approach is to place a portion of cash in escrow at signing or at an interim milestone, especially when the buyer has identified likely leakage risks or when the seller’s credit quality is weak.
Flow-of-funds design is where lock-ups translate into real protection. In a completion accounts deal, the closing statement typically computes enterprise value less net debt plus or minus the working capital adjustment. The lock-up helps ensure net debt is not artificially increased by cash extraction, and that working capital is not artificially improved by delaying payables. In a locked-box deal, the flow-of-funds typically includes a fixed price plus permitted leakage adjustments, with a covenant that any non-permitted leakage is reimbursed pound-for-pound.
Priority of payments at closing can also embed a lock-up. The closing funds flow can require that certain payables are settled at closing out of proceeds, or that specific intercompany balances are netted and waived. This matters when sellers have historically used the target as a funding source, because otherwise the buyer can inherit a payable that is economically a distribution already taken.
Working capital lock-ups change what you underwrite, not just what the lawyers negotiate. In a model, the key is to translate interim-period behavior risk into a liquidity and leverage swing at close. A simple illustration shows why the focus is on behavior. Assume a business with a working capital target pegged to normal seasonality. In the last month pre-close, the seller delays $10 million of supplier payments beyond customary terms and accelerates $10 million of collections by offering discounts. The closing balance sheet shows an apparently improved working capital position, and in a completion accounts deal the buyer may pay a positive working capital adjustment. Post-close, the buyer must pay the suppliers and absorbs the margin hit from discounts, reversing the effect.
In an IC memo, this should read like a financing risk, not a legal footnote. State whether the lock-up is covenant-only or includes third-party cash control, and quantify the potential swing in net debt and working capital if the seller optimizes for its own benefit in the interim period. If you are building an LBO model, reflect a downside case where working capital at close is worse than target and the revolver is drawn from day one.
Implementation should run as a mini workstream with clear ownership. Start in diligence by mapping all bank accounts, sweeping arrangements, supplier finance, and intercompany settlement routes. Then build a leakage map that links each route to a proposed covenant, a reporting line item, and a remedy that can be collected. If you need a broader diligence structure, align it with your M&A due diligence plan so treasury is not treated as an afterthought.
Kill tests help avoid dead ends. If the target cannot be operationally separated from the seller’s cash pool within the signing-to-closing period, do not rely on covenant promises alone. Require escrow or treat sweeps as debt-like for pricing purposes, consistent with how you think about net debt adjustments. If the seller refuses meaningful reporting and the signing-to-closing period is long, assume higher leakage risk and either demand stronger remedies or reprice. If supplier finance is opaque and the seller cannot provide program documentation and transaction-level data, treat exposure as debt-like and restrict any program changes.
Drafting pitfalls are consistent because they mirror incentives. Overbroad definitions of permitted leakage can swallow the rule. Vague ordinary-course language without a past-practice anchor invites litigation. Materiality qualifiers can make breaches non-actionable. Remedy clauses that require proving loss can be hard when the harm is timing and reversal rather than permanent loss. Where possible, remedies should be pound-for-pound repayment, set-off against deferred consideration, or release from escrow, rather than damages arguments after the seller has distributed proceeds.
Comparisons and alternatives clarify where lock-ups fit. A larger escrow can substitute for a lock-up when behavior is hard to control, but it ties up seller proceeds and can be politically hard in auctions. A locked-box structure with tight anti-leakage can reduce post-close disputes but shifts more risk onto interim covenants and disclosure quality. Completion accounts provide a quantitative reconciliation but remain vulnerable to classification disputes and delayed cash effects. If you are running a sell-side M&A process, tighter, clearer lock-ups can also reduce buyer discounting by narrowing what is “up for debate” after closing.
Working capital lock-ups protect value at closing when they are specific, monitored, and tied to remedies you can actually collect. For finance professionals, the career-relevant takeaway is simple: map treasury flows early, model the downside liquidity swing, and negotiate measurable constraints that keep the pricing bargain intact through the signing-to-closing window.
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