A valuation often yields a nice number: the enterprise value. But that’s not the same as the price you, as the seller, ultimately receive. To get from value to price, the “price bridge” is constructed. Working capital and net debt play a central role in this process. In this blog, you’ll learn how it works and why it often makes a difference of hundreds of thousands in the final deal.
From Enterprise Value to Equity Value
Enterprise value reflects the value of the company as a whole. However, shareholders receive the equity value, which is derived from an adjustment:
Equity Value = Enterprise Value – Net Debt ± Working Capital Adjustment
This makes it clear what the seller actually ends up with.
What is included in net debt?
Net debt is more than just bank loans. It includes all interest-bearing liabilities minus excess cash. For example:
- Long-term loans and demand deposit accounts
- Lease and Installment Purchase Obligations
- Tax arrears or provisions
- Min: excess cash not needed for operations
A low net debt means a higher equity value. It is therefore crucial to know in advance what is and isn't included in the definition.
Working Capital and the Target Level
Working capital is the difference between current assets and current liabilities, excluding cash and debt. It indicates how much money is tied up in inventory, accounts receivable, and accounts payable. Buyers and sellers usually agree on a target level.
- If working capital exceeds this level on the transfer date, the seller will receive a positive adjustment.
- If it's underneath, the price will be reduced.
This may sound technical, but in practice it can save tens of thousands to hundreds of thousands of euros.
Cash traps and excess cash
Not all the money on the balance sheet is freely available. Sometimes money is “tied up” in subsidiaries or joint ventures: a cash trap. That does not count as excess cash. On the other hand, there may also be genuine surplus cash that is freely distributable. That increases the equity value.
Closing Accounts vs. Locked Box
There are two calculation methods for transactions:
- Closing accounts: The price is determined based on the balance sheet as of the transfer date.
- Locked box: The calculation is based on a historical balance sheet, with compensation for the intervening period.
Closing accounts ensures accuracy, while the locked-box method offers speed and certainty upfront.
Why Preparation Pays Off
Many business owners focus primarily on the headline value. But it’s the details of the price bridge that make the difference. Those who manage their working capital effectively, define terms clearly, and avoid surprises will ultimately come out ahead.
Frequently Asked Questions
What is included in net debt?
Loans, leases, and past-due obligations. Surplus cash, on the other hand, is deducted.
How do you determine the target level for working capital?
This is often based on a 12-month average, adjusted for seasonal effects.
Which method is better: closing accounts or the locked box method?
The locked-box method offers speed and certainty, while closing accounts is more accurate but requires more work.
Are you expecting a sale or acquisition soon? Make sure your price bridge is accurate and that you don’t lose value unnecessarily. Hogenhouck M&A helps you clearly define and substantiate your working capital and net debt, so you can negotiate from a position of strength.
