Various concepts of value pass by in acquisition processes. Entrepreneurs are often unclear about what exactly is meant by de ondernemingswaarde and share value and what this means for the ultimate purchase price.
These ambiguities can lead to friction between the seller and the buyer. These are often issues that can be prevented/managed by hiring an expert acquisition consultant.
Equity value
In the vast majority of transactions, bids(non-binding offers) are made on a cash-and-debt-free principle. That is, the value of the business as if there were no (excess) cash and no (interest-bearing) debt in the business. As you know, this is rarely if ever the case, a company almost always has cash and cash equivalents and/or a debt position on the balance sheet. The formula to get from enterprise value to equity value is as follows:
Enterprise value
(+)
Cash & cash-like items
(-)
Debts & debt-like items
(+/-)
Net working capital adjustment / Net working capital
=
Equity value
At first glance, this seems like a simple formula, but this so-called equity bridge regularly leads to discussions within an acquisition process, especially about the definitions of cash-like and debt-like items. A current example is the various coronary loans (NOW, tax deferrals) that must be repaid. Although these debts are not interest-bearing and may sometimes even be repaid over several years, they are not considered regular working capital items.
Working capital
An important part of the buyer' s due diligence will focus on a working capital analysis, which determines which components of working capital are of a recurring nature and which are not. The latter are then classified as debt-like (or cash-like item). Of course, this is not always black and white, but often remains an assessment, as in the cash and debt free calculation, cash and/or debt is calculated to arrive at the value of equity. However, the amount of cash and/or interest-bearing debt varies with the fluctuation of working capital.
For this reason, the parties often agree that a transaction should be settled up to a normal level of net working capital. That is, a normative working capital should be determined that is representative of current normal operations. If on the effective acquisition date there is a surplus (ergo: more working capital than normative and therefore also a higher debt position or lower cash level) then the surplus is taken into account in determining the debt/cash position.
On the contrary, when there is a working capital shortfall, the shortfall is added to interest-bearing debts or deducted from cash and cash equivalents. When calculating a normative working capital, the end-of-month balances for the last 12 or even 24 months are often looked at. Currently, we see that corona can also be a disturbing factor here. We therefore see that sometimes even up to 36 months back is looked at to determine the average working capital.
Wallet
It should be clear that it is rarely immediately clear to an entrepreneur to what extent the amount mentioned by the buyer in his initial bid can be traced back to the amount the seller can expect to find in his wallet. In addition, in bids some commitment from the selling entrepreneur is regularly expected, this may be in the form of an earn-out, or a reinvestment.
IRIS Corporate Finance has over 12 years of experience in assisting DGAs within sale and purchase processes. If you would like to discuss such a process or if you have already received an indicative offer and it is not entirely clear to you what this could mean financially, please do not hesitate to contact us.
