Headline Value Is an Opinion. Cash to Seller Is a Calculation.
A transaction has two prices. The first is the one that gets announced, celebrated internally and written into the term sheet: enterprise value, usually expressed as a multiple of EBITDA, arrived at after months of positioning. The second is the one that arrives in the seller's account — equity value, net of everything the sale and purchase agreement says must be deducted from it. Between the two sits the bridge, and on a mid-market deal the distance across it routinely runs to a material fraction of the headline.
What makes the bridge decisive is not that it is large. It is that it is negotiated later, in a different register, and frequently by different people. Enterprise value is settled by principals in a room, on commercial logic. The bridge is settled in mark-ups of a definitions schedule, by advisors, on technical ground — and its individual line items rarely feel material enough at the time to escalate. A seller who concedes the treatment of a pension deficit on a Tuesday, the classification of customer deposits on a Thursday, and the reference period for the working capital peg the following week has not lost an argument. They have lost several, none of which felt like the price.
This article sets out the bridge as it is actually argued: the mechanical structure, the definition fights inside net debt, the debt-like items that constitute the real battleground, how the working capital peg is set and why the choice of reference period is worth more than most of the warranty schedule, and the consequences of choosing a locked box over completion accounts. It is written for the party who will be sitting opposite someone who does this every week. It is also written from the side of the table our transaction advisory practice usually occupies: where we act for a seller, the definitions schedule is negotiated before the multiple is agreed, not after.
Enterprise value is what the parties agreed the business is worth. Equity value is what the documents say the seller gets. Only one of them is enforceable.
Cash-Free, Debt-Free Describes the Starting Point, Not the Outcome
Almost every private transaction is struck on a cash-free, debt-free basis. The phrase is widely used and narrowly understood. It means the parties have agreed a value for the operating business as if it carried no borrowings and held no surplus cash — so that the multiple applied to EBITDA is a statement about operations rather than about the seller's financing choices. It does not mean the seller keeps the cash and walks away from the debt as a matter of course, and it settles nothing about the many balance-sheet items that are neither obviously cash nor obviously debt.
The bridge is the mechanism that converts that operating value into a payable sum. Its canonical form is short, which is part of the problem: each line looks like an accounting identity rather than a negotiation.
| Line | Direction | What it is | Where the argument sits |
|---|---|---|---|
| EV | Start | Enterprise value — the agreed value of the operating business, typically a multiple of a normalised earnings measure. | Settled by principals. Also the only number most people remember. |
| − | Deduct | Gross debt — borrowings, overdrafts, loan notes, accrued but unpaid interest, and typically breakage costs on early repayment. | Rarely contested in principle. Contested at the edges: what is borrowing versus trade finance. |
| + | Add | Cash and cash equivalents at completion. | Heavily contested. Whether cash is available, trapped or already committed is the fight. |
| − | Deduct | Debt-like items — obligations that are not borrowings but function economically as debt the buyer inherits. | The principal battleground. Open-ended by construction; see section 03. |
| ± | Adjust | Working capital against the agreed peg — a pound-for-pound adjustment for delivering more or less than the normalised level. | Decided by the peg, which is set by reference period. See section 04. |
| = | Result | Equity value — the consideration payable for the shares, before any escrow, retention or deferred element. | Not negotiated. It is whatever the four lines above produce. |
Only the first line is agreed commercially. Every line below it is defined in the sale and purchase agreement, and each definition is drafted by someone with a position.
The structural point is easy to state and easy to underweight: equity value is not agreed. It is computed, from definitions agreed earlier, applied to a balance sheet that in most cases does not yet exist at the time of signing. A seller negotiating hard on the multiple while accepting the buyer's first draft of the definitions schedule has optimised the visible number and conceded the mechanism that determines it. When our transaction advisory practice is brought in after heads of terms are signed, the definitions schedule is the first document we ask to see, ahead of the disclosure letter and ahead of the warranty catalogue.
Not All Cash on the Balance Sheet Is Cash You Are Paid For
Net debt looks like the least contestable line in the bridge. It is a subtraction of two figures both of which appear on a balance sheet that has been audited. In practice it is where a great deal of value moves, because the accounting question — is this a cash equivalent? — and the transaction question — will this cash be available to the buyer on day one, free of restriction? — have different answers, and the sale and purchase agreement adopts the second.
On the cash side, three categories are routinely reclassified out of the seller's favour. Trapped cash is cash held in a jurisdiction or entity from which it cannot be repatriated without material cost, delay or regulatory consent; a buyer will argue it is not worth its face amount and frequently that it should be excluded or discounted. Restricted cash — sums held in escrow, pledged as collateral, or subject to a bank's security — is not available to the business and a buyer will resist paying for it as though it were. Cash that is committed but not yet spent, such as a declared but unpaid dividend, is on the balance sheet on the measurement date and belongs to someone else. Our advisers treat trapped cash as a diligence question before it is a drafting one: whether repatriation is genuinely constrained, and at what cost, is a matter of fact that can be established early, and it is far cheaper to establish it than to concede the point in a mark-up.
Customer deposits and cash held on behalf of clients are the sharpest version of this. The money is unquestionably in the bank account. It is also, in substance, a liability that will be discharged in cash — an advance against goods not yet delivered or funds held to a third party's order. A buyer will argue it is either excluded from cash or matched by a corresponding debt-like deduction; the seller who has counted it as cash has counted the same amount twice. The correct treatment depends entirely on whether the corresponding obligation has been captured elsewhere in the bridge or in the working capital definition, which is exactly why these two schedules must be read against one another rather than in sequence.
The discipline that resolves most of this is not clever drafting but consistency. Any item removed from cash must be tested for whether its obligation is also being deducted as a debt-like item, and any item included in working capital must be excluded from net debt. Double-counting in a bridge is common, rarely deliberate, and almost always runs in the direction of the party who drafted the schedule. Our financial due diligence team reads the net debt definition and the working capital definition side by side as a single exercise rather than in sequence, because the double-counts only become visible where the two are set against one another.
Debt-Like Items Are Where the Bridge Is Actually Won
A debt-like item is any obligation which is not borrowing but which the buyer will have to settle in cash, and which the seller has therefore effectively left behind. The category has no closed definition, which is the entire reason it is contested: a buyer's list is a work of advocacy, and there is always one more item that can be argued onto it. In the mandates our transaction advisory practice runs, this schedule attracts more revision cycles than any other document in the transaction, and we resource it accordingly. Documents reaching our review desk come from a network of 80+ specialist consultants working across 22 countries, which is how a recurring schedule becomes a pattern rather than one adviser's impression.
The principled test is narrow and worth holding to. An item is properly debt-like when it is a present obligation, arising from past events, which the buyer must discharge in cash, and which is not already captured in the earnings multiple or in working capital. Each limb does work. An obligation already reflected in normalised EBITDA has been paid for through the multiple, and deducting it again is double-counting. An obligation that sits inside the working capital definition cannot also sit in net debt. And a future cost that is discretionary — one the buyer chooses to incur — is an investment decision, not an inherited liability. Where we act for a seller, our advisers put each proposed item to those four limbs in writing and ask the buyer to say which limb it satisfies, because an item that cannot be placed against one of them is usually withdrawn rather than defended.
| Item | Buyer argues | Seller argues | Where it commonly lands |
|---|---|---|---|
| Defined benefit pension deficit | A quantified obligation the buyer must fund; deduct in full on a funding or buy-out basis. | Deduct on the accounting (IAS 19) basis at most; the deficit is long-dated and assumption-driven, not a debt falling due. | A negotiated basis between the two, since the measurement basis moves the number far more than the principle does. |
| Deferred or underspent capital expenditure | Maintenance capex deferred before sale flatters EBITDA and must be spent immediately; deduct the shortfall. | Future spending is the buyer's decision and its benefit accrues to them; a multiple already reflects the asset base acquired. | Deducted where the deferral is demonstrable against the company's own plan, resisted where it is merely asserted. |
| Earn-out and deferred consideration from prior acquisitions | A contractual sum payable to a third party which the buyer inherits; deduct at expected value. | Deduct only the probability-weighted amount, and only where the obligation is not contingent on post-completion performance the buyer controls. | Deducted, with the argument moving to measurement rather than to principle. |
| Unpaid or disputed tax | A liability of the target that the buyer will settle; deduct, and cover the disputed element by indemnity as well. | Deduct only amounts due and payable; disputed assessments belong in the tax covenant, not in the price. | Split — quantified liabilities in the bridge, contested positions in the tax deed. |
| Factored or discounted receivables | Financing dressed as a working capital position; treat the drawn facility as debt. | Where the arrangement is non-recourse the receivable has genuinely been sold and no obligation remains. | Turns on recourse. With recourse it is treated as debt; without it, the working capital definition must be adjusted to match. |
| Lease liabilities recognised under IFRS 16 | The standard puts a liability on the balance sheet; deduct it as debt. | If the multiple was struck on post-IFRS 16 EBITDA, rent has been added back and deducting the liability charges the same cost twice. | Determined by which EBITDA the multiple was applied to. The two must be consistent, and this is the single most common inconsistency in current bridges. |
| Dilapidations on leased property | A contractual obligation to restore premises which will be paid in cash at lease end; deduct the provision. | Deduct only where the lease is ending in the near term and the liability is quantified rather than provisioned. | Deducted where near-dated and quantified; resisted where remote. |
| Deferred revenue | Cash already collected for services the buyer must still deliver — the buyer performs, the seller was paid. | It is an ordinary trading balance and belongs in working capital, where the peg already normalises it. | The most genuinely contested item on the list. Treatment turns on whether the cost to deliver is material and whether the peg captures the balance. |
Positions summarised here are the arguments customarily advanced by each side; they are not legal advice and no outcome is standard. Where an item "usually lands" reflects common negotiated practice rather than any rule, and every deal turns on its own facts and drafting.
Two of these deserve emphasis because they are where sophisticated parties still get caught. The IFRS 16 point is a pure consistency error rather than a matter of judgement: the standard requires lessees to recognise a right-of-use asset and a lease liability for substantially all leases, which removes rent from operating costs and lifts reported EBITDA. If the multiple was applied to that higher EBITDA and the lease liability is then deducted as debt, the buyer has taken the benefit of the add-back and the deduction at once. The answer is not to argue the item but to establish which EBITDA the multiple was struck on, and to say so in the definitions. Our valuation team states the earnings basis on the face of the valuation rather than in a footnote to it, precisely so that this argument has a documented answer before it is raised.
Deferred revenue is harder because both positions are respectable. Where the remaining cost to serve is small — a maintenance contract with little incremental cost — the balance behaves like ordinary working capital and the peg handles it. Where the cost to serve is substantial, the buyer is genuinely inheriting an obligation funded by cash the seller has already received, and a deduction is defensible. A seller who concedes the full balance as debt-like without testing the cost to serve has usually given away more than the argument was worth. In the mandates our advisers run, the deferred revenue line is the one most often reopened after the first draft, and our financial due diligence team therefore prices the cost to serve as a diligence workstream in its own right rather than treating it as a drafting position to be taken later. A definition that is contested repeatedly across that many hands is telling you something structural about the mechanism, not about the counterparty.
The Reference Period Is Worth More Than the Warranty Schedule
The working capital adjustment exists to stop the seller from manufacturing cash out of the balance sheet before completion. Left unadjusted, a seller could collect receivables aggressively, stretch payables, and run down inventory, converting working capital into cash which is then added to the price under the net debt line. The mechanism is a peg: the parties agree a normalised level of working capital that the business ought to carry, and the price moves pound for pound with the difference between the level delivered at completion and that peg.
Everything therefore depends on the peg, and the peg depends almost entirely on the reference period chosen to derive it. This is the least visible decision in the transaction and frequently the most valuable. A peg set on the average of the last twelve months, the last three month-ends, the same month in the prior year, or a budgeted forward level will produce four materially different numbers for the same business. Where our transaction advisory practice is instructed early enough to shape the position, all four are computed before any one of them is proposed, so that the reference period is chosen with its consequence known rather than accepted because it appeared first in a draft.
Seasonality is what turns that choice into money. Consider a business — the illustration is generic and the figures are chosen only to show the mechanism — whose working capital cycles between a low of 40 in its quiet season and a high of 100 at its peak, averaging 70 across the year. Set the peg at the twelve-month average of 70 and complete at the seasonal low of 40, and the seller pays 30 into the bridge for delivering exactly the balance sheet the business normally carries at that time of year. Set the peg on the three month-ends preceding a completion timed to the trough, and the peg is closer to 40, and no adjustment arises. The business is identical in both cases. The consideration is not.
This is why the reference period is negotiated by people who have seen it decide outcomes, and why a peg should be derived from a monthly series long enough to expose the cycle rather than from whatever period the data room happens to present cleanly. Where genuine seasonality exists, the more defensible construction is a peg that varies with the completion month, or a mechanism that averages across a full cycle. A single-point peg applied to a seasonal business is not a normalisation. It is a bet on the completion date, and the party choosing that date is rarely the seller. Our advisers will not sign off a peg derived from quarter-end balances alone where a monthly series is available, because the quarter-ends are the four points in the year least likely to expose the cycle.
One further distinction is worth stating because the terms are used loosely. The peg is the agreed normalised level against which the adjustment is measured. The target, where the documents use that word separately, is the level the seller undertakes to deliver. Where the two are the same figure the point is academic; where a buyer proposes a target above the peg, the seller is being asked to deliver more working capital than the price credits them for, and the difference is simply a price reduction expressed in another schedule.
One bridge, walked line by line
A mid-market deal struck at 120 enterprise value. Each line below is a definition applied to a balance sheet, and each is the outcome of a negotiation that happened before the balance sheet existed. All figures are in millions and are illustrative only.
- Agreed Enterprise value — 120.0
Struck at 8.0x a normalised EBITDA of 15.0. This is the number that appears in the announcement and in the seller's expectations. Note for later that the multiple was applied to post-IFRS 16 EBITDA, which will matter two lines down.
- Mechanical Less gross debt — (28.0) · Add cash — 12.0
Borrowings of 28.0 are deducted without argument. Of the 14.0 of cash on the balance sheet, 2.0 sits in a subsidiary from which repatriation requires consent and attracts withholding; the buyer declines to pay full value for it and it is excluded. Naive net debt of 14.0 has become 16.0. Running total: 104.0.
- Contested Less debt-like items — (9.5)
A pension deficit at 4.0 on the agreed measurement basis, deferred maintenance capex of 2.5 evidenced against the company's own asset plan, and an inherited earn-out from a prior acquisition at an expected 3.0. The buyer also proposed the IFRS 16 lease liability of 6.0; the seller established that the multiple was struck on post-IFRS 16 EBITDA and it was withdrawn, since deducting it would have charged the same cost twice. Running total: 94.5.
- Decided by the peg Working capital against peg — (4.0)
The peg was set at 18.0 on a twelve-month average. Completion falls in the seasonal trough and the business delivers 14.0 — the level it carries every year at that point in its cycle. The shortfall of 4.0 is deducted. Had the peg been derived from a completion-month reference, no adjustment would have arisen. Equity value: 90.5.
The headline was 120.0 and the seller receives 90.5. A seller who had assumed enterprise value less simple net debt would have expected 106.0 — a difference of 15.5, none of which involved reopening the multiple. Of that, 6.0 was avoided by the seller on the IFRS 16 point alone; the 4.0 working capital deduction was determined months earlier by the choice of reference period. Both were technical arguments, and both were worth more than any warranty in the agreement.
Move the Levers and Watch the Consideration Move
The instrument below builds the bridge from the inputs you set. It is seeded with the illustrative deal above so it is meaningful on arrival: adjust the headline value, move cash between available and trapped, switch individual debt-like items on and off, and set working capital against the peg.
Two readouts are worth watching more than the equity value itself. The delta shows what the bridge has moved the price by relative to the naive assumption — enterprise value less simple net debt — which is the figure most sellers carry in their head. The sensitivity line names the single lever currently costing the most, which is generally where negotiation effort is worth spending.
- Available cash = cash − trapped cash
- Equity value = EV − gross debt + available cash − Σ (debt-like items ON) + (working capital − peg)
- Delta vs naive = equity value − (EV − gross debt + total cash)
The naive comparison deliberately uses total cash and no debt-like items, because that is the calculation a seller performs before the definitions schedule arrives. The delta is therefore a measure of what the bridge itself did, not of whether the deal was good.
EV-to-Equity Bridge Builder
Seeded with the illustrative deal above. All figures in millions; the currency is immaterial to the mechanism.
The bridge moved the price by -15.5m against a naive enterprise value less simple net debt of 106.0m.
- Enterprise value 120.0
- Less gross debt −28.0
- Add available cash 12.0
- Less debt-like items −9.5
- Working capital vs peg −4.0
- Equity value 90.5
- Gross debt is the largest single deduction at 28.0m.
Illustrative only. Nothing entered here is transmitted or stored; the instrument runs entirely in your browser.
Locked Box or Completion Accounts Decides Who Owns the Gap
Everything above assumes a bridge computed on a balance sheet drawn at completion. That is the completion accounts mechanism, and it is one of two conventions. The choice between them determines who carries the economics of the business between signing and closing, and it changes where the leverage sits after the price is agreed.
Under completion accounts, the bridge is calculated on accounts prepared after closing, typically by the buyer, and the consideration is trued up once they are agreed or determined by an expert. The attraction is accuracy: the price reflects the balance sheet actually delivered. The cost is that the seller has signed without knowing the final consideration, and the party preparing the accounts is the party that now controls the business and its records. Disputes are common, resolution is slow, and the seller is arguing about their own former business from the outside.
Under a locked box, the price is fixed by reference to a historical balance sheet — the locked box accounts, at the locked box date — and does not move afterwards. Economic risk and reward pass to the buyer from that date even though legal ownership passes at completion. There is no post-completion adjustment, so the seller knows the consideration at signing. The protection the buyer receives instead is a set of covenants against leakage: the seller undertakes that no value has left the target to the seller or its connected persons since the locked box date, other than items the parties have expressly agreed as permitted leakage.
That distinction is the operative one. Leakage is value transferred out to the seller side — dividends, management fees, bonuses connected to the sale, non-arm's-length transactions — and is recoverable, typically pound for pound. Permitted leakage is the schedule of things the parties agreed in advance were acceptable, such as an agreed pre-completion dividend or ordinary-course remuneration for sellers who work in the business. A seller who fails to schedule an intended payment as permitted leakage has agreed to hand it back. The schedule deserves the same attention as the definitions of debt-like items, and receives it far less often. On locked box mandates our transaction advisory practice builds the permitted leakage schedule from the seller's own intended payments outward, rather than reviewing the buyer's draft and adding to it, because the omissions in that schedule are by their nature the items nobody thought to mention.
Because the buyer takes the economics from the locked box date but does not pay until completion, locked box deals commonly carry an equity ticker: an agreed rate applied to the price for the period between the two dates, compensating the seller for the delay. The rate and the basis on which it accrues are negotiated, and where the gap to completion is long — a deal awaiting regulatory clearance, for instance — the ticker is a substantive commercial term rather than a formality.
The practical guidance is not that one mechanism is superior. It is that they allocate different risks and reward different capabilities. A locked box favours a seller with clean, recent, reliable accounts and a well-run auction, and it eliminates post-completion argument at the cost of accepting a historical balance sheet. Completion accounts favour a buyer who expects the balance sheet to move, or a business whose position at closing is genuinely uncertain. What a seller should not do is accept completion accounts and then negotiate the definitions schedule as an afterthought, because that combination hands the counterparty both the mechanism and the measurement. Our advisers take the mechanism question before the definitions question on every mandate, since the choice determines who prepares the numbers that the definitions will later be applied to.
The Bridge Rewards Preparation, Not Position
The consistent feature of the arguments set out above is that none of them is won by negotiating harder. They are won by having established, before the schedule arrives, which EBITDA the multiple was struck on, what the working capital cycle actually looks like across a full year, which balance-sheet items are captured in the peg and therefore cannot also be debt-like, and which of the buyer's proposed deductions have already been paid for through the multiple. Each of those is a matter of record. None of them is a matter of leverage. That is why our transaction advisory practice treats bridge preparation as diligence work rather than as negotiation support, and staffs it before the schedule arrives rather than in response to it.
This is why the bridge tends to reward the party who prepared for it rather than the party with the stronger commercial position. A seller who arrives with a working capital analysis on a monthly series, a reasoned position on each item likely to be proposed as debt-like, and a clear statement of the earnings basis has not made the buyer's arguments go away. They have made them expensive to advance, which in a process running to a timetable is most of what matters. The positions set out in this article are the ones our advisers take on live mandates; they are stated here in full because a reader who applies them without instructing anyone has been served correctly. They are drawn from work delivered by a network of 80+ specialist consultants across 22 countries, which is the only reason they are offered as observations about the mechanism rather than as one practitioner's preference.
The instrument above will show, in a few minutes, what a given set of definitions does to consideration. It is worth running before the definitions schedule is received rather than after, because the difference between the two is the difference between setting the terms of the argument and responding to them. The bridge is where advisory fees earn out, and it earns out in preparation — which is available to anyone willing to do it.
How this work is carried out
Projectzo has prepared valuations and transaction documentation for listed companies, acquirers and their counsel since 2010, across 22 countries — including the completion mechanics described here, where the drafting decides who carries the shortfall. Each mandate is assigned a single senior advisor, from scoping through final delivery, and is read adversarially by a second senior reviewer before release. Engagements begin at USD $2,500.
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