finance Navigating the EV to equity bridge


Bob Alsop, corporate finance partner at the Thames Valley office of national audit, tax and advisory firm Crowe Clark Whitehill talks to The Business Magazine about how now, more than ever, due diligence providers are able to deliver real cash value in the final stages of a deal


We all know that getting appropriately scoped and robust due diligence in respect of corporate transactions is essential. But the real value of due diligence is in the deal advice that it informs. It’s all about providing our clients with the insight and guidance they need to make smart investment decisions that create lasting value.


This advice comes in many shapes and forms, but one area where I am spending an increasing amount of time is supporting our clients in their negotiations around final equity value. Specifically, providing them with a detailed understanding, and our view, in respect of each of the component parts of the enterprise value (EV) to equity value bridge (see figure below).


EV to equity bridge £ Enterprise value (EV) Net cash/debt Actual working capital


Target/’normal’ working capital


Working capital adjustment


Equity value X (X)


£ X


X/(X)


X/(X) X


Typically deals are done on a cash-free/ debt-free, ‘normal’ working capital basis, with the agreed enterprise value being adjusted for each in determining final equity value. So deciding on whether a balance is debt or working capital in nature, and then agreeing on a ‘normal’ (or target) working capital is key.


The problem here though is that there is no statutory or formal accounting definition of net debt and working capital to guide the parties. Yes, of course there are areas of black and white, but there are also areas of grey. It is fundamental to have a detailed understanding of each and every balance


} THE BUSINESS MAGAZINE – THAMES VALLEY – APRIL 2017


<- headline price (typically a multiple of underlying earnings)


in the target balance sheet. How does each balance behave? Is it working capital or debt in nature? Does it actually belong in the pricing mechanic at all?


This is a complex and subjective area, where there is scope for huge value transfer between buyer and seller


It is fair to say that a lot of the debate centres on deferred income. However, this is not the only candidate. For example, debate has also started to occur in respect of treatment of invoice discount lines in the context of their fixed/minimum and variable elements.


worked on a transaction whereby the definition of net-debt and working capital, and the period used to establish a suitable working capital target, led to a difference in equity value in excess of £700,000.


<- sometimes referred to as ‘surplus cash’ if positive


<- actual value of shares


But agreeing (or not) on the definition is only part of the story. You then need to adjust it for the impact of any underlying earnings adjustments; decide on the period over which the target should be based (past 12 months, past six months, or maybe past six plus forecast six); and then consider any intra-month cashflows. And all this alongside the process of identifying any off balance sheet debt-like items that need to be considered as part of the net-debt adjustment.


This is a complex and subjective area, where there is scope for huge value transfer between buyer and seller. I recently


businessmag.co.uk 41


The key message here is to make sure you understand the composition of the balance sheet in detail and how each balance behaves, so that you are well equipped before you sit down to negotiate final equity value. Your due diligence providers are well placed to help you with this.


At Crowe, we focus on providing sensibly scoped and priced corporate finance and due diligence advice, with involvement from the most senior people in our firm. In 2016 our UK corporate finance team advised on over 50 domestic and cross-border transactions.


For more information visit croweclarkwhitehill.co.uk


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