Headline Value Is an Opinion. Cash to Seller Is a Calculation.
Every transaction has two prices.
The first one gets announced. Enterprise value, struck as a multiple of EBITDA, arrived at after months of positioning. It's the number that goes in the press release.
The second is the one that reaches the seller's account: equity value, net of everything the sale and purchase agreement says must come off.
Between them sits the bridge. On a mid-market deal, the distance across it routinely runs to a material fraction of the headline.
What makes the bridge decisive isn't its size. It's when the bridge gets argued, and by whom.
Enterprise value is settled by principals, in a room, on commercial logic. The bridge is settled weeks later in mark-ups of a definitions schedule, by advisors, on technical ground.
No single line item ever feels big enough to escalate.
A seller concedes the treatment of a pension deficit on a Tuesday. The classification of customer deposits on a Thursday. The reference period for the working capital peg the week after.
They haven't lost an argument. They've lost several, and none of them felt like the price.
This article sets out the bridge as it's actually argued: the mechanical structure, the definition fights inside net debt, the debt-like items that form the real battleground, how the peg is set, and what turns on choosing a locked box over completion accounts.
It's written for the party sitting opposite someone who does this every week. It's also written from the side of the table our transaction advisory practice usually occupies, where the definitions schedule is negotiated before the multiple is agreed, not after.
Enterprise value is what the parties agreed the business is worth. Equity value is what the documents say the seller gets. Only one of them is enforceable.
The Enterprise-to-Equity Bridge Starts at Cash-Free, Debt-Free
Almost every mid-market deal is agreed on a cash-free, debt-free basis. The phrase sounds like a simplification. It's closer to an agenda.
It says the buyer acquires the operating business without its surplus cash and without its borrowings. What it doesn't say is which balances count as either.
That question is answered in the definitions schedule, and the answer is worth more than most of the warranty package.
The mechanics are simple enough to state in one line. Enterprise value, less net debt, plus or minus the working capital adjustment, equals equity value.
Each term in that line is defined, not observed. Every definition has an author, and every author has a position.
| Line | Direction | What it is | Where the argument sits |
|---|---|---|---|
| EV | Start | Enterprise value — the agreed value of the operating business, typically a multiple of a normalised earnings measure. | Settled by principals. Also the only number most people remember. |
| − | Deduct | Gross debt — borrowings, overdrafts, loan notes, accrued but unpaid interest, and typically breakage costs on early repayment. | Rarely contested in principle. Contested at the edges: what is borrowing versus trade finance. |
| + | Add | Cash and cash equivalents at completion. | Heavily contested. Whether cash is available, trapped or already committed is the fight. |
| − | Deduct | Debt-like items — obligations that are not borrowings but function economically as debt the buyer inherits. | The principal battleground. Open-ended by construction; see section 03. |
| ± | Adjust | Working capital against the agreed peg — a pound-for-pound adjustment for delivering more or less than the normalised level. | Decided by the peg, which is set by reference period. See section 04. |
| = | Result | Equity value — the consideration payable for the shares, before any escrow, retention or deferred element. | Not negotiated. It is whatever the four lines above produce. |
Only the first line is agreed commercially. Every line below it is defined in the sale and purchase agreement, and each definition is drafted by someone with a position.
Read the table above as a sequence of drafting decisions rather than a calculation.
The first line is commercial. The parties argued about the multiple and the earnings basis, and they reached a number.
Every line beneath it is technical. It was drafted by one side's advisors, circulated, marked up and settled, usually without the principals reading it closely.
That's the whole asymmetry. The headline is negotiated by the people who own the outcome. The bridge is negotiated by the people who own the document.
Not All Cash on the Balance Sheet Is Cash You Are Paid For
A seller reads the cash line and sees consideration. A buyer reads the same line and starts sorting.
The sorting question is always the same. Could the business have paid this out the day before completion without damaging its operations?
Where the answer is no, the buyer argues it isn't surplus cash at all. It's working capital wearing a different label.
Four categories come up in nearly every process.
First, cash held where repatriation is restricted or carries a tax cost. The buyer argues it should be valued at what it's worth once extracted, not at face.
Second, customer deposits and advance payments. Legally the company's cash; commercially an obligation to deliver. Buyers routinely reclassify these as debt-like.
Third, cash required to clear the payment run. Cheques written but not presented, payroll days from settlement. Real cash that's already committed.
Fourth, restricted balances: collateral, escrow, amounts held against guarantees. Cash the business doesn't control.
None of these arguments is unreasonable. That's precisely what makes them effective.
A seller who hasn't decided their position on each category before the first draft arrives will concede them one at a time, on their merits, and discover the aggregate only at completion.
Debt-Like Items Are Where the Bridge Is Actually Won
Borrowings are rarely contentious. A term facility is a term facility, and both sides deduct it.
The argument is about everything else the buyer proposes to treat as though it were borrowing.
The test a buyer applies is functional, not accounting-led. Does this obligation represent money the business must find, which a new owner will have to cover?
Framed that way, the category stretches a long way, and the drafting incentive is to stretch it.
The table below sets out the items that recur, and the argument each side customarily makes.
Deferred revenue is the line buyers propose most often. It's cash already collected against a service still to be delivered, so the buyer argues they inherit the cost of delivering it and deduct accordingly.
The seller's answer is that the cost of delivery, not the revenue booked, is the obligation. The two are rarely the same figure, and the gap is pure consideration.
One inconsistency deserves flagging on its own, because it's the most expensive error a seller can leave unchallenged.
If the multiple was struck on post-IFRS 16 EBITDA, lease costs have already been removed from earnings. Deducting the lease liability again as debt charges the seller twice for the same obligation.
Both steps look defensible in isolation. Together they're double-counting, and on a lease-heavy business the amount isn't marginal.
| Item | Buyer argues | Seller argues | Where it commonly lands |
|---|---|---|---|
| Defined benefit pension deficit | A quantified obligation the buyer must fund; deduct in full on a funding or buy-out basis. | Deduct on the accounting (IAS 19) basis at most; the deficit is long-dated and assumption-driven, not a debt falling due. | A negotiated basis between the two, since the measurement basis moves the number far more than the principle does. |
| Deferred or underspent capital expenditure | Maintenance capex deferred before sale flatters EBITDA and must be spent immediately; deduct the shortfall. | Future spending is the buyer's decision and its benefit accrues to them; a multiple already reflects the asset base acquired. | Deducted where the deferral is demonstrable against the company's own plan, resisted where it is merely asserted. |
| Earn-out and deferred consideration from prior acquisitions | A contractual sum payable to a third party which the buyer inherits; deduct at expected value. | Deduct only the probability-weighted amount, and only where the obligation is not contingent on post-completion performance the buyer controls. | Deducted, with the argument moving to measurement rather than to principle. |
| Unpaid or disputed tax | A liability of the target that the buyer will settle; deduct, and cover the disputed element by indemnity as well. | Deduct only amounts due and payable; disputed assessments belong in the tax covenant, not in the price. | Split — quantified liabilities in the bridge, contested positions in the tax deed. |
| Factored or discounted receivables | Financing dressed as a working capital position; treat the drawn facility as debt. | Where the arrangement is non-recourse the receivable has genuinely been sold and no obligation remains. | Turns on recourse. With recourse it is treated as debt; without it, the working capital definition must be adjusted to match. |
| Lease liabilities recognised under IFRS 16 | The standard puts a liability on the balance sheet; deduct it as debt. | If the multiple was struck on post-IFRS 16 EBITDA, rent has been added back and deducting the liability charges the same cost twice. | Determined by which EBITDA the multiple was applied to. The two must be consistent, and this is the single most common inconsistency in current bridges. |
| Dilapidations on leased property | A contractual obligation to restore premises which will be paid in cash at lease end; deduct the provision. | Deduct only where the lease is ending in the near term and the liability is quantified rather than provisioned. | Deducted where near-dated and quantified; resisted where remote. |
| Deferred revenue | Cash already collected for services the buyer must still deliver — the buyer performs, the seller was paid. | It is an ordinary trading balance and belongs in working capital, where the peg already normalises it. | The most genuinely contested item on the list. Treatment turns on whether the cost to deliver is material and whether the peg captures the balance. |
Positions summarised here are the arguments customarily advanced by each side; they are not legal advice and no outcome is standard. Where an item "usually lands" reflects common negotiated practice rather than any rule, and every deal turns on its own facts and drafting.
Notice what the table doesn't contain: a rule.
Where an item lands reflects negotiated practice, the relative leverage of the parties, and how early each side declared its position. It isn't a standard, and it doesn't survive contact with a determined counterparty.
The seller's protection is sequence, not argument. Every item on that list is cheaper to resist in a term sheet than in a mark-up.
The Reference Period Is Worth More Than the Warranty Schedule
The working capital adjustment exists to stop a seller dressing the balance sheet before completion.
The parties fix a normal level of working capital, called the peg. Deliver above it and the seller is paid the excess. Deliver below it and the shortfall comes off.
The principle is uncontroversial. The number isn't.
The peg is almost always set as an average over a reference period, and the choice of that period is the entire negotiation.
A seasonal business doesn't have one normal level of working capital. It has a range, and where the average falls depends on which months are counted.
Twelve months smooths the cycle. Six months captures whichever half suits the party proposing it. Three months is a position dressed as a calculation.
The mechanism is symmetrical in the drafting and asymmetrical in practice. Buyers negotiate pegs regularly. Most sellers do it once.
Two further terms decide how much the peg is worth.
One is the definition of working capital itself: which balances are in, which are out, and whether anything counted in the peg is also deducted as debt-like.
The other is the treatment of a deficit, which is where an apparently neutral mechanism becomes directional.
One bridge, walked line by line
A mid-market deal struck at 120 enterprise value. Each line below is a definition applied to a balance sheet, and each is the outcome of a negotiation that happened before the balance sheet existed. All figures are in millions and are illustrative only.
- Agreed Enterprise value — 120.0
Struck at 8.0x a normalised EBITDA of 15.0. This is the number that appears in the announcement and in the seller's expectations. Note for later that the multiple was applied to post-IFRS 16 EBITDA, which will matter two lines down.
- Mechanical Less gross debt — (28.0) · Add cash — 12.0
Borrowings of 28.0 are deducted without argument. Of the 14.0 of cash on the balance sheet, 2.0 sits in a subsidiary from which repatriation requires consent and attracts withholding; the buyer declines to pay full value for it and it is excluded. Naive net debt of 14.0 has become 16.0. Running total: 104.0.
- Contested Less debt-like items — (9.5)
A pension deficit at 4.0 on the agreed measurement basis, deferred maintenance capex of 2.5 evidenced against the company's own asset plan, and an inherited earn-out from a prior acquisition at an expected 3.0. The buyer also proposed the IFRS 16 lease liability of 6.0; the seller established that the multiple was struck on post-IFRS 16 EBITDA and it was withdrawn, since deducting it would have charged the same cost twice. Running total: 94.5.
- Decided by the peg Working capital against peg — (4.0)
The peg was set at 18.0 on a twelve-month average. Completion falls in the seasonal trough and the business delivers 14.0 — the level it carries every year at that point in its cycle. The shortfall of 4.0 is deducted. Had the peg been derived from a completion-month reference, no adjustment would have arisen. Equity value: 90.5.
The headline was 120.0 and the seller receives 90.5. A seller who had assumed enterprise value less simple net debt would have expected 106.0 — a difference of 15.5, none of which involved reopening the multiple. Of that, 6.0 was avoided by the seller on the IFRS 16 point alone; the 4.0 working capital deduction was determined months earlier by the choice of reference period. Both were technical arguments, and both were worth more than any warranty in the agreement.
Move the Levers and Watch the Consideration Move
The instrument below builds the bridge from the inputs you set. It is seeded with the illustrative deal above so it is meaningful on arrival: adjust the headline value, move cash between available and trapped, switch individual debt-like items on and off, and set working capital against the peg.
Two readouts are worth watching more than the equity value itself. The delta shows what the bridge has moved the price by relative to the naive assumption — enterprise value less simple net debt — which is the figure most sellers carry in their head. The sensitivity line names the single lever currently costing the most, which is generally where negotiation effort is worth spending.
- Available cash = cash − trapped cash
- Equity value = EV − gross debt + available cash − Σ (debt-like items ON) + (working capital − peg)
- Delta vs naive = equity value − (EV − gross debt + total cash)
The naive comparison deliberately uses total cash and no debt-like items, because that is the calculation a seller performs before the definitions schedule arrives. The delta is therefore a measure of what the bridge itself did, not of whether the deal was good.
EV-to-Equity Bridge Builder
Seeded with the illustrative deal above. All figures in millions; the currency is immaterial to the mechanism.
The bridge moved the price by -15.5m against a naive enterprise value less simple net debt of 106.0m.
- Enterprise value 120.0
- Less gross debt −28.0
- Add available cash 12.0
- Less debt-like items −9.5
- Working capital vs peg −4.0
- Equity value 90.5
- Gross debt is the largest single deduction at 28.0m.
Illustrative only. Nothing entered here is transmitted or stored; the instrument runs entirely in your browser.
Locked Box or Completion Accounts Decides Who Owns the Gap
Two mechanisms determine consideration, and the choice decides who carries the risk between signing and completion.
Completion accounts fix the price after the event. The balance sheet is drawn up at completion, the bridge is applied to actual figures, and the consideration is trued up.
That's accurate. It's also slow, and it hands the preparing party, usually the buyer, control of the first draft at a point when the seller has already lost possession of the business.
A locked box fixes the price at a historical balance sheet date before signing.
The seller is paid a known figure. Economic risk and reward pass at the box date, and the buyer is protected by leakage covenants against value leaving the business after it.
Certainty is the trade. The seller knows the number; the buyer accepts a balance sheet they can't re-examine.
Neither mechanism is superior. They allocate different risks, and the right answer depends on the quality of the historical numbers and how long the gap between signing and completion will be.
What matters is that the choice is a pricing decision, not a process one.
A seller who agrees completion accounts has agreed to negotiate the price again, later, against a draft they didn't write.
The Bridge Rewards Preparation, Not Position
Nothing in the bridge is exotic. Every item in it is known, and every argument has been made before.
What varies is when each side works out its position.
The buyer's advisors arrive with a view on every line, because they arrive with a precedent schedule and a mandate to be thorough.
The seller frequently forms a view line by line, under time pressure, while also running a business and answering diligence.
That's the asymmetry, and it's one of preparation rather than leverage.
The practical consequence is a matter of sequence. Every position in the bridge is cheaper to take in a term sheet than in a mark-up of a definitions schedule.
Before exclusivity, a seller has alternatives. After it, they have a counterparty and a timetable.
A seller who defines net debt, names the debt-like items they won't accept, and fixes the reference period for the peg before exclusivity hasn't been difficult. They've priced their own deal.
Where our transaction advisory practice acts on a sale, the definitions schedule is negotiated before the multiple is agreed. The multiple is what gets announced. The schedule is what gets paid.
How this work is carried out
Projectzo has prepared valuations and transaction documentation for listed companies, acquirers and their counsel since 2010, across 22 countries — including the completion mechanics described here, where the drafting decides who carries the shortfall. Each mandate is assigned a single senior advisor, from scoping through final delivery, and is read adversarially by a second senior reviewer before release.
Commission a business valuation