Calculator · Pricing
EV to equity bridge
Turn an enterprise value into what actually lands in the seller's account: cash, debt, debt-like items and the working capital true-up.
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What you receive
£32.8m
−21.9% against the £42m headline
- Net debt
- £7.2m
- Equity value
- £34.2m
Gross figure, before tax and before any consideration that is deferred, rolled over or contingent on an earn-out. Nothing you type here leaves your browser.
How it works
What the EV to equity bridge is
Almost every offer for a private company is expressed as an enterprise value — the value of the business as an operating whole, on a cash-free, debt-free basis. The number that reaches the seller is the equity value, after the balance sheet has been taken into account. The bridge is the arithmetic between the two.1
It is the single most common source of disappointment for first-time sellers. A headline of £42m can easily become £32m in the bank, without anyone having renegotiated the price.
Each line of the bridge
Cash
The seller is paid for cash left in the business at completion — but only cash the buyer can actually use. Bank balances and cash equivalents usually count. Trapped cash — rent deposits, regulatory or customer-held balances, cash needed to run the tills — is often excluded, and buyers will argue for leaving a minimum operating balance in.2
Financial debt
Bank loans, loan notes, shareholder loans and accrued interest are repaid at completion out of the purchase price. Ordinary trade creditors are not debt; they sit in working capital.
Debt-like items
This is where most of the negotiation happens. A debt-like item is any liability the buyer will have to fund after completion for something that relates to the period before it. Typical examples:1
- Deferred revenue — cash received for work not yet done
- Accrued bonuses and holiday pay
- Corporation tax on pre-completion profits
- Overdue creditors stretched to flatter cash
- Capital expenditure already committed but not paid
- Finance leases and hire purchase
- Dilapidations and make-good provisions
Working capital adjustment
Buyers expect the business to be handed over with a normal level of working capital. The sale agreement sets a target (the peg); after completion, actual working capital is compared with it and the price moves pound for pound. Below the target, the seller refunds the shortfall; above it, the buyer pays the excess.4 Read more on how the peg is set.
Transaction costs
Your own advisers — corporate finance, legal, sell-side diligence — and any insurance premium you have agreed to pay. These do not change the equity value, but they come out of what you receive.
A worked example
Common mistakes
- Comparing offers on headline alone. Two bids of £40m with different debt-like definitions are not the same bid. Ask every bidder for an illustrative bridge on your latest balance sheet.
- Treating the debt-like list as fixed. It is negotiated in the sale agreement. Every item you keep off it is worth its full value to you.
- Ignoring seasonality in the peg. A target set from a quiet month and a completion in a busy one (or the reverse) can swing the adjustment either way. See the quality-of-earnings guide.
- Forgetting that part of the price may not be cash. Deferred consideration, rolled equity and earn-outs are paid later, if at all. Split them out before celebrating.
Sources
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RSM Australia, “Debt free, cash free transactions — the devil is in the detail” (January 2020). ↩ ↩2
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Gateley, “What does ‘cash free’ and ‘debt free’ actually mean?” (June 2023). ↩
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IFRS Foundation, IFRS 16 Leases. ↩
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Lander & Rogers, “M&A purchase price adjustment mechanisms — completion accounts vs locked box” (September 2023). ↩
Frequently asked questions
What is the difference between enterprise value and equity value?
Enterprise value is the value of the business itself, independent of how it is financed — the price on a cash-free, debt-free basis. Equity value is what the shares are worth: enterprise value plus cash, minus debt and debt-like items, adjusted for working capital. It is the number that is actually paid to the shareholders.
What does cash-free, debt-free mean?
It means the headline price assumes the seller takes out surplus cash and repays financial debt at completion. In practice the business keeps a normal level of working capital, so ‘cash-free’ really means ‘free of cash above what the business needs to trade’.
What are debt-like items?
Liabilities that are not bank debt but behave like it from the buyer’s point of view, because the buyer will have to pay them out of cash the seller has already been paid for. Common examples are deferred revenue, accrued bonuses, tax on pre-completion profits, unpaid capital expenditure, finance leases and dilapidations. There is no fixed list; each item is negotiated.
Is a working capital adjustment always negative for the seller?
No. If working capital at completion is above the agreed target, the price goes up; if it is below, the price goes down. The adjustment is only as fair as the target, which is why the way the target (peg) is set matters so much.
Does this calculator work for a locked-box deal?
Yes, with one change of reading. In a locked box the cash, debt and working capital figures come from the locked-box balance sheet rather than from completion accounts, and there is no post-closing true-up. Enter the locked-box figures and set the working capital line to zero.