28. November 2023

The reconciliation of enterprise value to the purchase price (equity value)

The reconciliation of enterprise value to the purchase price (equity value)

Net debt plays an important role in a corporate transaction, as it is the bridge between the enterprise value and the purchase price (equity bridge). It is essentially made up of interest-bearing financial liabilities less cash and cash equivalents. However, other factors such as postponed investments or a working capital adjustment can also be taken into account. Positive net debt means that the company has more debt than cash and cash equivalents, i.e. the purchase price is lower than the enterprise value. Negative net debt therefore means that the company has more cash and cash equivalents than debt. In this case, the purchase price is higher than the enterprise value. We explain the most common net debt positions below:

  • Cash and cash equivalents
    This item refers to cash and cash equivalents, deposits with banks and short-term investments that can be easily converted into cash.
  • Cash-like items
    These are liabilities that a company has to other parties and can therefore be regarded as liquid assets. Examples of such items are deposits, trade tax or corporation tax reclaims and loans granted.
  • Interest-bearing liabilities
    Interest-bearing liabilities are primarily bank liabilities such as credits and loans. They represent both current and non-current financial obligations that must be repaid. They can also include overdraft facilities. Loans granted to the company by shareholders are also included here.
  • Other liabilities (debt-like items)
    These are obligations that a company has to external parties and are therefore considered debt-like items. Examples of such items are genuine factoring, leasing liabilities, provisions for pensions and provisions for trade tax and corporation tax payments.

Although the following factors cannot be described as “classic” net debt items, they are regularly taken into account when determining the purchase price:

  • Deferred investments
    If a company has an investment backlog, e.g. due to liquidity problems, the necessary investments that a new owner has to make immediately after the takeover are also deducted from the enterprise value.
  • Working capital equalization
    A working capital analysis is carried out in particular for companies with cyclical business models. The average working capital during the year is calculated and compared with the working capital at the time of the transfer of the company shares. If the difference is positive, this leads to an increase in the purchase price and vice versa.

The reconciliation from enterprise value to purchase price – Our conclusion

Net debt plays a central role in any purchase price negotiation by establishing the link between the company value and the actual purchase price. Net debt is made up of interest-bearing financial liabilities less cash and cash equivalents and can be influenced by other factors such as postponed investments or a working capital adjustment. A detailed elaboration and analysis during the preparation of the transaction is a must in order to avoid surprises that can quickly lead to a reduction in the purchase price. Overall, the consideration of net debt positions illustrates the complexity and multi-layered nature of company valuations, in which not only the theoretical company value, but also the financial structure and other influencing factors play a decisive role.

We are happy to advise you

Marcel Brix

Managing Director | BLOK Management GmbH

Oliver Kolb

Managing Director | BLOK Management GmbH

Further insights

Become part of Blok Management

Become part of Blok Management

Whether you are just starting out or have extensive professional experience – everyone will find the right challenge for their career with us. We believe in the skills of our team and want us to grow together – that is our promise.

Podcast „M&A and currywurst“

Podcast „M&A and currywurst“

BLOK Management presents the podcast „M&A and Currywurst“ – industry and insider talk from the lunch break.