The multiple gets the attention, but the definition of debt in the share purchase agreement moves the price for the shares one euro at a time.
Every euro an item adds to net debt comes off the equity price one for one, so a disputed debt-like item is priced by its own amount, not by the multiple. On an illustrative €118.0 million enterprise value, six arguable items worth €20.70 million separate the buyer's equity price of €61.17 million from the seller's €81.87 million: 17.5 per cent of enterprise value, 25.3 per cent of the seller's price, and 1.40 turns of EBITDA that nobody negotiated as a multiple.
Worked in full in Closing the Deal by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The headline in a letter of intent is cash-free and debt-free. The price for the shares is that headline less whatever the share purchase agreement defines as debt, and the definition is drafted after the multiple has been agreed, often by people who were not in the room when it was. A turn of multiple is fought over for weeks; the same money in the debt definition is often settled in a mark-up. The calculation below puts both columns side by side. It is the negotiation view, buyer against seller over one set of accounts; the line-by-line bridge a fund uses to mark a holding is worked in what goes in the enterprise value to equity value bridge.
| Item | Amount | Status |
|---|---|---|
| Enterprise value, 8.0 × LTM EBITDA of 14.75 | 118.00 | Agreed |
| Bank debt, overdraft, finance leases | 38.10 | Not disputed |
| Deferred consideration, declared dividend, seller's deal costs | 5.50 | Not disputed |
| Undisputed debt and debt-like items | 43.60 | |
| Cash 6.80, less trapped cash 1.90 | 4.90 | Free cash |
| Working capital 22.40 against a peg of 19.83 | 2.57 | Adjustment, added |
| Operating leases capitalised | 7.90 | Disputed |
| Pension deficit, funding basis | 3.60 | Disputed |
| Deferred revenue | 3.40 | Disputed |
| Capital expenditure committed, uninvoiced | 2.60 | Disputed |
| Corporation tax payable | 2.05 | Disputed |
| Accrued but unpaid bonuses | 1.15 | Disputed |
| Disputed items | 20.70 |
Equity price = EV − debt and debt-like items + free cash + (working capital − peg)
Value of a disputed item to the seller = its amount, euro for euro
Keep every item on its own row with a switch of 1 or 0 beside it, and sum with =EV-SUMPRODUCT(Amounts,Switches)+FreeCash+(NWC-Peg). The buyer's column has every switch at 1; the seller's has the six disputed switches at 0. The difference between the two columns must equal =SUMPRODUCT(Disputed,1-SellerSwitches), which is the check that nothing else moved.
Step 1, the seller's column: 118.00 − 43.60 + 4.90 + 2.57 = 81.87. Net debt on the seller's reading is 38.70.
Step 2, the buyer's column adds the six disputed items, 20.70, so debt and debt-like items total 64.30 and net debt 59.40. The equity price is 81.87 − 20.70 = 61.17.
Step 3, express the gap three ways, because each audience hears a different one. As a share of enterprise value it is 17.5 per cent. As a share of the seller's price it is 25.3 per cent, since equity is the thin residual under the debt. As a multiple, the buyer's bridge is the same as paying 97.3 for a debt-free business, 6.60 times EBITDA instead of 8.0: 1.40 turns given up without anyone discussing the multiple.
| Item | Amount | % of EV | Turns of EBITDA | % of seller's price |
|---|---|---|---|---|
| Operating leases capitalised | 7.90 | 6.7 | 0.54 | 9.6 |
| Pension deficit, funding basis | 3.60 | 3.1 | 0.24 | 4.4 |
| Deferred revenue | 3.40 | 2.9 | 0.23 | 4.2 |
| Capex committed, uninvoiced | 2.60 | 2.2 | 0.18 | 3.2 |
| Corporation tax payable | 2.05 | 1.7 | 0.14 | 2.5 |
| Accrued but unpaid bonuses | 1.15 | 1.0 | 0.08 | 1.4 |
| Total | 20.70 | 17.5 | 1.40 | 25.3 |
The leases are 38.2 per cent of the gap on their own, more than half a turn of multiple. Whether they belong in net debt depends on how the EBITDA the multiple was applied to treats them: if lease costs sit above EBITDA, deducting the liability as well charges the seller twice; if the multiple was struck on EBITDA before lease costs, the liability belongs in the bridge. The same test of consistency applies to the pension (funding or accounting basis, before or after tax relief), to deferred revenue (cash already received for work the buyer will now have to do), and to tax and bonuses, which are recurring liabilities that many sellers argue belong in working capital and therefore in the peg. The lease question is worked separately in whether uncapitalised leases count as debt.
A quarter of a turn of multiple here is 3.69. The leases alone are worth more than twice that, the pension alone about the same. If the deal team would argue for a week over a quarter turn, it should spend at least as long on the definition of debt.
| Outcome | Disputed items in net debt | Equity price | Against the seller's column |
|---|---|---|---|
| Seller wins every item | 0.00 | 81.87 | 0.00 |
| Leases and pension in, the other four out | 11.50 | 70.37 | −11.50 |
| Leases out, the other five in | 12.80 | 69.07 | −12.80 |
| Buyer wins every item | 20.70 | 61.17 | −20.70 |
Winning the single largest item is worth less to the seller than winning the five smaller ones together. A negotiation that trades the leases for everything else, because the leases are the item everyone has heard of, leaves 12.80 on the table against 7.90 recovered.
Counting an item twice. Accrued bonuses, tax payable and deferred revenue all sit naturally in working capital. If one of them is moved into net debt, it must also come out of working capital at completion and out of the peg, on the same definition. Leave the 1.15 of bonuses in both and the seller pays for them twice, 2.30, once through net debt and once through a working capital figure that is lower than it should be against a peg that excluded them. The way the estimate and the final accounts interact is in how a completion accounts adjustment is calculated.
Price each debt-like item at its own amount, then translate the total into turns of multiple so the deal team sees it at the scale it negotiates. Here 20.70, six lines in a definitions schedule, is 1.40 turns and a quarter of the seller's price. The free workbook for this case holds the twelve items with a switch on each, so both columns can be read at once.
Liabilities that are not borrowings but will be settled in cash after completion for a period before it, so a buyer deducts them from enterprise value like debt. Common candidates are lease liabilities, pension deficits, deferred revenue, tax payable, unpaid bonuses and committed capex. On the illustrative deal six such items total €20.70 million, 17.5 per cent of a €118.0 million enterprise value.
No. A debt-like item reduces the equity price by its own amount, one euro for one euro, not by the multiple. Translating it into turns of EBITDA only shows its scale: on €14.75 million of EBITDA, €7.90 million of capitalised leases is 0.54 turns, and the six disputed items together are 1.40 turns, more than a negotiator would ever concede on the multiple itself.
It should not be. If accrued bonuses of €1.15 million are deducted as a debt-like item and also left in completion working capital, while the peg excludes them, the seller pays twice, €2.30 million in total. Whatever moves into net debt must leave the working capital definition and the peg on the same basis.
This article is one calculation from Closing the Deal. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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