Completion Mechanisms, Working Capital and Earn-Outs — What the Price on the Signature Page Actually Means
Julian R. Sterling
Five Excel workbooks. Every figure the book prints is reproduced by a live formula in the first
four, and each of them ends with a checks sheet listing the book’s figure beside what the
workbook computes. The fifth is a working document: the eighty questions of Appendix A, with
room to answer them. They are free. Nothing is gated behind a sign-up, and no email address is
asked for.
Everything described below is inside it, with the read-me.
Chapters 3 to 9 · the reconciliation
The equity bridge, both columns at once
The reconciliation from an agreed enterprise value of €118.0 million to the price
actually paid for the shares, one line per item, with the buyer’s column and the
seller’s column side by side. Twelve debt-like items, six of them genuinely arguable, each
with its own switch: set a switch to zero and the item leaves net debt.
The two defensible bridges are €61.17 million and
€81.87 million — and nobody is arguing about the business. The whole
€20.70 million is a disagreement about definitions in a document, which is why it is
settled by whoever drafted first and read hardest rather than by whoever is right about the
company.
Sheet 3 adds up the five things the drafting moves: €47.76 million, or
40.5 per cent of the enterprise value. They overlap, and no single deal fights
all five to the maximum. The total measures the size of the terrain, not a prediction.
The_Equity_Bridge.xlsx · XLSX · 11 KB
Chapters 10 to 13
Locked box or completion accounts, on identical terms
The same deal both ways, on identical commercial terms, with nothing changed except the
machinery. The difference is €6.56 million in the seller’s favour
— and sheet 2 splits it between its two causes, because they are completely different
in nature.
€11.90 million of it is when the debt-like items were settled.
In a locked box that argument happens before signing, while the seller can still walk away. In
completion accounts it happens after, and the buyer prepares the accounts. That is a difference
in bargaining position, not in accounting, and it is the part of the mechanism nobody puts a
number on.
The rest is where in the seasonal cycle the balance sheet falls, plus the ticker and the
leakage — the parts that do get argued about, and that turn out to be the smaller half.
Twelve months of a seasonal manufacturer swinging from €16.9 to
€23.9 million of working capital, and five defensible definitions of the target. Same
business, same balance sheet, same completion date: €7.00 million of
spread, decided by the choice of a sentence.
Sheet 3 is the one to look at. It runs each peg against every month of the year. The
twelve-month average produces an adjustment of −2.93 in one month and +4.07 in another
— a €7.00 million lottery on the completion date, which is the
strongest argument a seller with a seasonal cycle has for a peg matched to the season.
The only definition on the list that compares like with like is the one nobody proposes.
Working_Capital_and_the_Peg.xlsx · XLSX · 11 KB
Chapters 20 to 27
Thresholds, shapes, and the six accounting choices
Six ordinary post-completion actions, none of them improper, each with a switch: a group
management charge, a change of accounting policy, integration costs, a synergy credit, a new
bonus accrual, deferred capex. Together they move EBITDA by €1.30 million a year and
remove €6.60 million of a €12.00 million earn-out on a
business that performed.
Sheet 3 runs the same performance through three shapes. The business earned €16.90
and €17.40 million against an €18.00 million target — short by 6.1 and
3.3 per cent. Straight-line, that is €6.90 million. Under a cliff it is
nothing at all.
Which is why cliffs get conceded cheaply: they cost nothing in the seller’s own
projection, and everything in the case that actually happens.
The_Earn_Out.xlsx · XLSX · 11 KB
Appendix A · the working document
Eighty questions on the price, live
The eighty questions of Appendix A as a checklist you can work in: the same eighty, in
the same order, generated from the same source file as the chapter, so the book and the workbook
cannot drift apart.
Columns for the answer, the source document, the owner and the date. The
status column is computed, and marks any question answered without a source as
“unsourced” — an answer whose authority is the other side is
not an answer. The Progress sheet counts only the sourced ones, in total and by section.
Start with section four. Working capital can be answered from the target’s own
monthly accounts without asking the other side anything, and the answers change what you ask
everywhere else.
Eighty_Questions_on_the_Price.xlsx · XLSX · 13 KB
Where the money actually moves
The price on the signature page is agreed in a room and then decided in a document. Five
mechanisms move it, and on this transaction they are worth
€47.76 million against an enterprise value of €118.0 —
40.5 per cent. That figure is not a prediction: the five overlap and no deal fights all
of them to the maximum. It is a measurement of how much of the price is settled after the
handshake.
The bridge
€20.70m — two defensible readings of the same twelve items
The mechanism
€6.56m — locked box against completion accounts, identical terms
The peg
€7.00m — five defensible definitions of one sentence
Earn-out protections
€6.60m — six ordinary accounting choices
Earn-out shape
€6.90m — cliff against straight-line, same performance
The part of the mechanism nobody prices
Locked box against completion accounts is usually argued as an accounting preference. On identical
commercial terms it is worth €6.56 million, and
€11.90 million of that is timing of the argument, not accounting. In a
locked box the debt-like items are settled before signing, when the seller can still walk. In
completion accounts they are settled afterwards, by the buyer, on the buyer’s draft.
Stated that way it stops being a preference and becomes a term. It is also the one line in the
comparison that a seller can win by insisting early and cannot win at all once the mechanism is
agreed.
Why a cliff is conceded cheaply and paid for dearly
In the seller’s own projection the business hits its target, so a cliff and a straight-line
earn-out are worth exactly the same thing: everything. That is why the concession is easy to make
in a late session. In the case that actually happened here — six per cent short in one year,
three in the next — the straight-line version pays €6.90 million and the cliff
pays nothing.
The workbook makes the shape a dropdown so the two can be compared on the seller’s own
downside case rather than on its base case, which is the comparison that decides whether the
concession is cheap.
Conventions used throughout
Blue on a pale fill
an input — you may edit these
Black text
a formula — do not overtype these
Yellow fill
the assumptions that carry the answer
A cell containing 1 or 0
a switch: 1 applies the item, 0 removes it
Checks sheet
thirty-three figures, each beside the figure the book prints
Amounts are in millions of euros. Meridian Components is fictional and deliberately
ordinary: a seasonal working capital cycle, a pension scheme, some leases, a family shareholder
and a private equity buyer. Nothing about it is exotic, and that is the point.
Thirty-three figures are tested across the four model workbooks and all thirty-three
reproduce, each to the precision the book prints at. If a check fails, the model is wrong
until proven otherwise — not the book.
Opening the files
The workbooks open in Microsoft Excel, LibreOffice Calc, Google Sheets and Numbers. They use
no macros and no add-ins, so nothing needs to be enabled or trusted. If your spreadsheet asks
to update links on opening, decline — there are none.
CMBS and CRE CLOsWhere the loss actually lands, from appraisal reduction to realised severity, and what the B-piece is really being paid for.
How to Read a Commercial LeaseThe three refinements chapter 19 names and never performs, and the renewal rate below which the mark-to-market is worth nothing.
How to Read a Credit AgreementWhere the default actually comes from, the cure that costs 5.5 times the other, and the capacity nobody adds up.
How to Read a Real Estate Loan AgreementThe cure ratio in closed form, the four-point window in which the cheap cure works, and the cure sized to the wrong threshold.
Office Real EstateA six per cent yield that returns 3.2 per cent once the re-letting cycle is paid for, and the headline-to-net-effective rent arithmetic.
Private Equity Real EstateBoth worked waterfalls to the dollar, the two capital stacks, and the arithmetic of the promote made changeable.
Private Markets PerformanceThirty-one of the thirty-three figures chapter 19 publishes reproduce exactly — and the two that do not are named rather than quietly adopted.
Raising a Real Estate FundThe chapter 17 funnel run on a calendar — when the first close actually lands, and why more travel does not help.
Real Estate FinanceFour people look at one building and reach four numbers; the lender is whole only above 105,109,489, twelve per cent below today’s value rather than forty.
Real Estate Financial ModelingProperty, development and fund models built line by line, and the modelling test worked end to end.
Real Estate Fund ManagementThe waterfall of 6.11, the build-to-core of 8.7 and the proceeds gap, reproduced as live formulas rather than asserted.
REIT Analysis and ValuationFFO of 532.0, AFFO of 381.0, net asset value and dividend safety — every figure a formula you can change.
Retail Real EstateThe occupancy cost of every unit in a centre, the sixteen per cent of the rent roll no tenant can sustain, and the right-size-convert-or-hold decision priced.
Sale and LeasebackA €179.5 million transaction end to end, with rent cover measured on the entity that actually signs the lease.
Self-Storage Real EstateThe cohort engine behind a 590-unit store, and the rate increase on existing customers priced against the move-outs it causes.
The Fund Finance ProfessionalChapter 8 builds the reported-to-eligible NAV bridge; chapter 9 computes every ratio without it. Two points at every state — and what a subscription line does to the IRR.
The Growth Equity InvestorWhat a pro rata cheque really costs, and the band where defending your ownership loses money.
The Private Credit InvestorThe two coverage ratios are not measured on the same thing: the erosion is 47.7 per cent, not the 28.7 the headline implies.
The Private Equity Fund Controller PlaybookThe book defines IRR, DPI, RVPI and TVPI, tells you to update them at the exit, and prints not one value. Computed: a 1.833× deal inside a fund at 0.892 TVPI.
The Venture Capital AssociateWhat defending a position costs, and how many companies a reserve pool actually defends.
Financial Risk ManagementA fund inside every limit that cannot meet a redemption — and the number that decides it is the one with no currency attached.
Business ValuationThree advisers land 26.8 per cent apart on one company, and the whole gap turns out to be 1.96 points of perpetual growth.
Quantitative FinanceThree models agree to a quarter of one per cent about a number that one unobservable input moves a hundred and three times as much.
Asset ManagementFour people quote four returns for one mandate, all correct and 2.7017 points apart — forty-eight times the manager’s net skill.
Alternative InvestmentsA manager reports 13.29 per cent and the endowment earns 6.26 — both correct, and only a third of the advertised advantage arrives.
Credit AnalysisFour defensible EBITDAs on one borrower give leverage from 3.19x to 6.47x — and the add-back argument is fifty times the covenant headroom.
Venture CapitalOne company out of twenty-eight returns 56.7 per cent of the fund, and half the capital goes in after the decision — at half the return.
Machine Learning for FinanceFive people quote the accuracy of one credit model, all five are right, and the number that decides how much money it makes is none of them.
Commercial Real Estate InvestingThe equity earned 8.6647 per cent and the investor received exactly 8.0000 — the preferred return, and nothing above it.
Mergers and AcquisitionsThe board paper says the deal creates 13,436,667 of value. The arithmetic says it destroys 17,530,855. Nobody is lying.
DerivativesThe treasury report says the hedge cost 1,233,698. That is the interest differential, not a cost.
Treasury ManagementFive cash balances for one company, all correct and 145,600,000 apart — and the revolver that is two-thirds of the liquidity leaves at a revenue fall of 8.4127 per cent.
Financial Planning and AnalysisRevenue 3.0190 per cent above budget and operating profit 16.3209 per cent below it, in the same quarter, with every figure correctly stated.
Energy TradingA position report that is 91.7031 per cent hedged and correctly computed, on a book that is short 2,542,000 MWh — and a margin call of 198,400,000 the next morning.
Construction Cost ControlA contract sum of 26,301,102 became a final account of 29,153,363 on the building that was drawn — and 85.8 per cent of what was lost was knowable on the day it was signed.
If this book helped — or didn’t — a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.