The sign-to-close gap is the problem both mechanisms solve. A purchase-price adjustment closes at a base price and trues up to actual working capital and net debt 60–90 days after close — it protects the buyer's economic snapshot at closing and dominates US sub-$5M agency deals for that reason. A locked box fixes the price at the locked-box date (the last audited balance sheet): all value created after that date belongs to the buyer, and all value extracted is "leakage" the seller repays. The locked box is more common in the UK, the EU, and larger deals; in the US small-agency market, the PPA is the default.
§ 01 · The two mechanismsTrue-up vs. fix.
| Dimension | Purchase-price adjustment | Locked box |
|---|---|---|
| Timing | Trues up 60–90 days post-close | Price fixed at the locked-box date |
| Best fit | Clean accrual financials | Stable working capital, short sign-to-close |
| Protection | Closing-date snapshot | Leakage indemnity outside the general cap |
The PPA adjusts five components in an agency deal: working capital (current assets minus current liabilities with specific inclusions and exclusions), cash at closing, net debt (a zero target — the seller delivers the book free and clear), commissions receivable and payable (the agency-specific complication), and unearned premium or prepaid carrier obligations. The target working capital is set as a trailing-12-month average, a single point-in-time figure, or a negotiated number — pick one and document it explicitly, because "working capital" is not self-defining and every inclusion and exclusion has to be listed.
§ 02 · The commission-allocation ruleThe agency-specific issue.
The commission-allocation rule is the agency-specific PPA issue. Agency-bill commissions allocate by policy effective date — the seller earned them when the policy took effect. Direct-bill commissions allocate by receipt date — the seller earned them when the carrier paid. Without an explicit rule, the parties spend the post-close window arguing which commissions "belong" to which side.
The allocation rule is the clause that turns an abstract working-capital true-up into a concrete, computable number for an agency, and it's the one most likely to be left vague in a generic template. Setting it explicitly — effective date for agency-bill, receipt date for direct-bill — forecloses the most common post-close PPA dispute. It pairs with the review process: 30–45 days for the seller to review the buyer's closing balance sheet, then 30 days to negotiate disputes, then an accountant referral for any unresolved items.
§ 03 · Choosing between themThe four-factor framework.
Four factors decide PPA versus locked box. Quality of seller financials — clean accrual-basis or CPA-prepared modified-cash books point to a PPA, while messy books make a locked box actually riskier, not safer, because there's no reliable baseline to lock. Sign-to-close window — a long 60-plus-day window favors a PPA, while a short window of 30 days or less bounds the locked-box leakage risk. Working-capital volatility — volatile working capital favors a PPA that trues it up, while stable working capital suits a locked box that fixes it without reconciliation work. And deal complexity and dispute tolerance. When a locked box is chosen, it requires three strong reps — balance-sheet accuracy on specified principles, no non-permitted leakage between the locked-box date and closing, and ordinary-course operation in that window — plus an exhaustive permitted-leakage list, where everything not enumerated is prohibited, and a leakage indemnity that recovers dollar-for-dollar outside the general cap.
§ 04 · The trust-account checkThe load-bearing reconciliation.
Whichever mechanism applies, the trust-account reconciliation is the load-bearing agency-specific check: the agency-bill premium trust accounts must reconcile to a defined position at close, and a buyer who doesn't peg the trust position can inherit a deficit. This is the check that has no analogue in a generic small-business deal — premium held in trust isn't the agency's money, so a shortfall in the trust account is a liability the buyer absorbs unless the closing balance sheet pegs it explicitly. Set the mechanism, define the working-capital target, write the commission-allocation rule, and peg the trust position, and the sign-to-close gap resolves cleanly instead of becoming a 90-day argument over who earned what.
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Terminology on this shelf
- Purchase-price adjustment
- A post-close true-up to actual working capital and net debt 60–90 days after closing — the US sub-$5M default.
- Locked box
- A price fixed at the last audited balance sheet, with post-date value to the buyer and extraction repaid as leakage.
- Working-capital target
- The agreed basis (TTM average, point-in-time, negotiated) — explicitly defined, with every inclusion listed.
- Commission-allocation rule
- Agency-bill by effective date, direct-bill by receipt date — the agency-specific PPA clause.
- Permitted-leakage list
- The exhaustive enumeration of allowed extractions in a locked box — everything else is prohibited.
- Trust-account reconciliation
- Pegging the agency-bill premium trust position at close — the load-bearing agency-specific check.