In the M&A business, we usually act with English terms. However, when it comes to the most important aspect, the purchase or sale price of a company, various components have an important impact on the final price.
We explain why the value of the company is not the value that ends up in the account. Let's take a look at the components of the company purchase or sale price together. What is a earn-out . equity bridge, threshold, ecrow and why it is essential to understand these terms in order to be satisfied in the end.
Axel Schulz, M&A consultant and managing director of EUROCON GmbH, Kiel, will be there again.
Content
Purchase price and enterprise value – Why these terms are not identical
When selling a company, the purchase price is not equal to the value of the company. In this podcast, we explain the key factors that influence the final purchase price.
Fixed purchase price and variable shares (earn-out)
A fixed purchase price forms the basis of many M&A deals. In some cases, however, a variable portion in the form of an earnout added. This secures the seller if they believe in the future growth of the company. Earnout payments are often spread over two to three years and depend on certain financial milestones.
Cash/Debt-Free Valuation
The purchase price calculation is usually based on a Cash/Debt-Free Valuation . All liabilities are deducted from the value of the company, while existing funds are added.
Networking Capital & Threshold
A company needs sufficient working capital to function smoothly. This Net Working Capital is also taken into account in the purchase price determination. Deviations from the defined threshold value can increase or decrease the purchase price.
Locked-Box Principle
That Locked-Box Principle is a method of setting a purchase price in which a company's financial data is set at a specified price. economic cut-off date ("Locked Box Date") can be used as the basis for the purchase price calculation.
Warranties and Retention
To hedge against risks and possible warranty violations, part of the purchase price is often retained for a certain period of time. This so-called Escrow ensures that buyers do not have to be liable for unexpected problems. This amount is often deposited in an escrow account for a certain period of time.
Equity Bridge
A fair purchase price calculation requires a transparent Equity Bridge . It is an essential concept in M&A transactions that establishes the link between the Enterprise Value (enterprise value) and the Equity Value (equity value). It is used to explain the discrepancy between the general market value of a company and the amount that is actually paid as the purchase price.
Conclusion: Transparency and communication are crucial
Successful M&A transactions are based on clearly defined clauses and transparent communication between buyer and seller. Both parties should understand the calculation methods and calculate early on to avoid disappointment.
Key takeaways of the episode
- Purchase price ≠ enterprise value – The sale price depends on many factors, such as debt and cash reserves.
- Earnout Clauses – A variable purchase price component often serves as a bridge to fairly account for future growth.
- Cash/Debt-Free Valuation – The purchase price is adjusted for debt and existing cash.
- Equity guarantees and withholdings – Buyers protect themselves against possible warranty violations through retention.
- Transparency and upfront invoices – Clarity and precise contract drafting are essential to avoid conflicts.
SUBSCRIBE TO THE PODCAST NOW!
More blog articles on M&A
What is an earn-out model and what are its advantages and disadvantages?
Post-Merger Integration: How to Burn Money Securely! These are the 7 biggest mistakes after a company takeover!
Buying or selling a company: You should definitely know these 3 types of due diligence review!
4 very concrete actions to increase the value of the company
